You’ve likely heard that life insurance is important. It provides a source of income for those who depend on you in the event of your death. Even if you don’t have anyone who depends on you financially, life insurance can help pay your end-of-life, burial, and funeral expenses, relieving the burden of this cost on your loved ones as they grieve.

So, there’s no denying the importance of life insurance, but if you’ve shopped for a policy, chances are you know there’s more than one type of insurance to choose from. The two most common types of life insurance include:

• Term Life Insurance: Term life insurance is a type of insurance that provides a death benefit for a predetermined term. For example, if you have a 20-year $250,000 term life insurance policy, your insurance company will pay your beneficiaries $250,000 if you die at any point over the next 20 years. Term life insurance is typically the least expensive type of life insurance.
• Whole Life Insurance: Whole life insurance, commonly referred to as permanent life insurance, is a type of insurance that provides a death benefit for the rest of your life, no matter how long that may be. Whole life insurance also has a cash value component that you may be able to take advantage of to bridge financial gaps in retirement.

Term Life Insurance

As mentioned above, term life insurance provides a death benefit for a predetermined period of time. When you choose to purchase a term life insurance policy, you can choose between short-term and long-term policies. In fact, most term life insurance policies last for five, 10, 15, 20, 25, or 30 years.

Term life insurance is typically a strong option for parents, as it can provide coverage for as long as your children might be financially dependent on you. Moreover, as long as you act in time, you may be able to convert your term life insurance to permanent coverage when you believe the time is right.

Pros

There are several benefits to term life insurance when you’re making the term vs. whole life insurance comparison. Some of the most important benefits of taking the term life insurance route include:

Affordable premiums

Term life insurance policies typically come with more affordable premiums than whole life insurance policies. In fact, according to Nerdwallet, the average annual cost for a $500,000 20-year term life insurance policy can be as low as $220 for super-preferred applicants. That works out to less than $20 per month.

$500 in whole life insurance for the same individual would cost an average of $4,652 per year, or $387.67 per month. That means an entire year’s worth of premiums for a term life insurance policy could be less expensive than a single month’s premium for a whole life insurance policy.

Flexibility in policy duration

As mentioned above, term life insurance policies typically last anywhere from five years to 30 years. That flexibility is important as you choose your life insurance policy. After all, long-term policies may come in handy for some reasons, while short-term policies may come in handy for others. For example:

• Short-term policies: A short-term policy may be more advantageous when your children are nearing adulthood. In just a few years, they’ll likely be independent. So, a short-term policy may make more sense in this case, especially for single parents.
• Long-term policies: A long-term policy is often best if you have young children or a spouse who depends on you financially. There’s a strong chance that they’ll depend on you for more than a decade, so long-term coverage is likely best.

Pure life insurance coverage

Term life insurance coverage may not offer a cash value component, long-term care benefits, or a wide range of other things you might be able to get with a whole life insurance policy, but that’s not necessarily a bad thing. Term life insurance is purely life insurance coverage, so it’s a far less complex product than whole life insurance.

Cons

Although there are plenty of reasons to consider enrolling in a term life insurance policy, these policies aren’t perfect. There are some instances in which whole life insurance wins in the term vs. whole life insurance comparison. Here are some of the most important:

No cash value accumulation

Unlike whole life insurance, term life insurance doesn’t have a cash value component. In fact, unless you purchase a return-of-premium rider (which can be costly), your policy will expire with no value unless you die before your term life insurance expires.

Coverage expires at the end of the term

Term life insurance only offers coverage for as long as the term lasts. So, if you purchase a five-year term life insurance policy, and you die five years and three months later, there won’t be any coverage under your policy for your family.

If you want to maintain coverage, you’ll need to renew your policy upon the expiration of the term or purchase an entirely new policy.

Premiums can increase upon renewal

Another downside to the fact that you’ll have to renew your policy is that there’s no guarantee that you’ll be able to renew your policy for the same price you paid during the original term. In fact, it’s nearly guaranteed that your premiums will go up.

The simple fact is that your premiums are based on the risk you pose to the insurer. As you age, the risk that you’ll die only grows. Therefore, premiums typically increase as you age.

Whole Life Insurance

As its name suggests, whole life insurance provides a death benefit for your entire life, no matter how long your life lasts. That is, as long as you pay your premiums. There are other benefits to whole life insurance too. One of the biggest is the cash value component. However, there are downsides to consider. Here are the pros and cons to think about when comparing whole life insurance to its term life insurance counterpart.

Pros

As mentioned above, there are several reasons you may want to consider choosing a whole life insurance policy over a term life policy. Some of the biggest benefits of whole life insurance policies include:

Guaranteed lifelong coverage

Unlike term life insurance, whole life insurance policies never expire. So, you won’t have to worry about shopping for a new life insurance policy in 20 or 30 years. Instead, you can rest assured that your beneficiaries will receive a death benefit, even if you live to be over 100 years old.

Cash value accumulation

Whole life insurance policies typically come with a cash value component. That means these policies build a cash value over time. That’s an important difference, because you may be able to tap into that cash value in the future.

For example, if you need long-term care but can’t afford it, you may be able to use some of your life insurance policy’s cash value to help bridge the gap between the care you can afford and the care you need.

Dividends and potential for growth

Although term life and whole life insurance policies are both investments, whole life insurance is the only one that has the potential to grow and produce dividends over time. The best part is that you can typically draw your dividends from your whole life insurance policy at any time. So, you can use these dividends to help supplement your retirement income or to cover unexpected expenses in retirement.

Cons

There are plenty of reasons that whole life insurance is a strong choice over term life insurance. However, no financial product is a one-size-fits-all solution, and whole life insurance policies aren’t an exception to that rule. Here are some ways whole life insurance falls short when you compare it to term life insurance options.

Higher premiums compared to term insurance

If you’re premium-sensitive, there’s a strong chance that term life insurance is going to be a better option for you. The simple fact is that whole life insurance is usually far more expensive than term life insurance.

In fact, considering the national averages mentioned above, one month of whole life insurance can cost more than an entire year of term life insurance. As a result, a whole life insurance policy may be cost-prohibitive for many. That’s especially the case for young, budding families.

Limited investment options within the policy

Whole life insurance is often referred to as an investment — and there’s no question that it is. Whole life insurance can grow over time, pay dividends, and even provide supplemental income in retirement. But, it may not be the best investment opportunity.

When you purchase whole life insurance, you’re typically given a handful of options centered around how your life insurance money will be invested. There’s limited recourse if you decide that the investment options available to you don’t fit your investment style. So, it’s important to look into the investment options available with a whole life insurance policy before you decide to sign up for it.

There is one caveat here. Some policies, known as variable universal life insurance policies, give you the ability to invest your life insurance earnings into accounts of your choosing.

Complex and less transparent than term insurance

Finally, while both term life and whole life insurance are financial products that should be given serious consideration, it’s far easier to understand term life insurance than it is whole life insurance. Term life insurance has a death benefit and likely a few riders to keep track of.

That’s the case for whole life insurance policies too. But the difference is that, with whole life insurance, you also have to consider investment opportunities, retirement planning, and much more. Ultimately, whole life insurance is a far more complex topic. As such, the product is typically more challenging for consumers to navigate than term life insurance.

Choosing the Right Policy for You

Ultimately, there are strong reasons to choose a term life policy and there are just as many great reasons to choose a whole life policy. The final decision boils down to you.

The simple fact is that everyone has unique circumstances. Your age, financial capabilities, and reason for wanting life insurance will all play a factor in whether term or whole life insurance is the better option for you.

Factors to Consider

There are important factors to consider as you decide if you’ll move forward with a term life insurance or a whole life insurance policy. Some of the most important factors you may want to take into account include:

Your financial goals and needs

Life insurance should be purchased to achieve specific goals. For example, some of the most common goals include:

• To make sure your spouse can afford the cost of living when your income is no longer available.
• To make sure your children don’t have to face financial hardships due to the loss of your income if you die.
• To make sure your children are afforded the best possible education, whether or not you’re here to pay for it.
• To make sure your spouse is taken care of.

Some of the needs and goals mentioned above may have short-term time horizons, while others have long-term horizons. In fact, you’ll likely want to make sure your spouse is taken care of financially for the rest of their life. Consider how your life insurance options address your financial needs and goals.

Budget and affordability

Although price shouldn’t be the only reason you choose one insurance option over another, it’s going to play a role in any financial decision you make. That’s especially the case when it comes to life insurance. After all, signing up for a life insurance policy that you can’t afford for the long term now isn’t going to provide much protection for your loved ones later.

The simple fact is that whole life insurance is typically far more expensive than term life insurance. So, a term life policy may be the best option if a whole life policy simply doesn’t fit into your budget.

Long-term vs. short-term financial planning

Life insurance isn’t just a way to protect your loved ones in the event of your death, it’s a financial planning tool. As you take part in financial planning, you’ll quickly find that you have important short-term as well as long-term goals.

It’s important to consider whether you’re purchasing your life insurance policy to address short-term or long-term goals when you decide what type of insurance to buy. Of course, if you’re purchasing life insurance to address a short-term need, term life insurance is likely going to be your best bet. On the other hand, if you’re purchasing life insurance to address a long-term need, whole life insurance could be what you’re looking for.

When Term Insurance Is Ideal – Scenarios where term insurance makes the most sense

There are several reasons term life insurance might be the better option in your situation. For example:

• Affordability: One of the biggest reasons people choose term life over whole life policies is the price. Term life insurance is significantly less expensive than whole life insurance. As such, if you’re on a limited budget, it’s likely better to choose a term life insurance policy.
• You Have a Short-Term Need: If you’re purchasing life insurance in an attempt to take care of a short-term need, like making sure your children have the money they need to go to college, term life insurance could be the perfect solution.
• Simplicity: If you want straightforward life insurance that’s easy to understand, term life insurance is likely your best option. Term life policies aren’t nearly as complex as whole life policies.

When Whole Life Insurance Is Ideal – Situations where Whole Life Insurance is a better fit

There are plenty of instances when a whole life insurance policy might be the better option. For example:

• You Want to Protect Your Spouse: Marriage is meant to last a lifetime, so 20 or 30 years may not be enough protection if you’re purchasing life insurance to protect your spouse. Instead, opt for a whole life policy to ensure that your spouse is protected no matter how long you live.
• You’re Planning Your Estate: Whole life insurance comes with tax benefits that could protect your estate in the long run. Speak with your financial advisor to find out if it makes sense to protect your estate from taxation with a whole life insurance policy.
• You Want to Build Cash Value: Cash value from a whole life insurance policy can come in handy when you retire. If you want your insurance to build cash value, consider enrolling in a whole life policy today.

The Bottom Line

Term life insurance and whole life insurance are both beneficial options for the right person. As with most other financial products, there’s no one-size-fits-all answer to whether term life or whole life is the best option. Ultimately, it’s important to consider your unique circumstances as you make this decision.

On the other hand, your expertise likely isn’t in insurance. So, navigating the insurance industry may prove to be challenging. That’s OK. Consider reaching out to an expert to help you make sure your insurance meets your needs. Contact an agent at Fidelity Life today at 1.866.853.3013 for help with all your life insurance questions and get a quote today.