Comparing Term and Whole Life Insurance

When choosing a life insurance policy, a key decision you’re likely to make is whether to choose term life insurance or whole life insurance (a type of permanent life insurance).

Generally, term life insurance is best for someone who needs the most affordable life insurance option for a certain period of time. Whole life insurance is more expensive than a similar term policy, but it lasts for your lifetime, and builds cash value that you can access during your life.

It’s also possible to have both term life insurance and whole life insurance at the same time. 

What is term life insurance? 

Term life insurance is a type of life insurance policy that pays a death benefit if the insured person dies during a specified term. If the policyholder is still alive at the end of the term, no death benefit will be paid out. 

Term life insurance policies also have no cash value component, so policyholders don’t get any value from a term life insurance policy beyond the death benefit. 

Benefits of term life insurance  

Affordability 

Because term life insurance covers a fixed term, rather than an individual's entire life, premiums are lower than they would be for a whole life policy with the same size death benefit.  This also means that with term life insurance, the same premium would buy a larger death benefit than it would with a whole life policy. 

Flexibility 

You can choose the time period you want to cover, for example, a 10- or 20-year term, or until a certain age, such as 85. Many term policies will also allow you to convert whole life insurance without having to take another medical exam. 

Limitations of term life insurance 

Coverage will end 

Term life insurance only lasts as long as the term you selected. Once the term is over, you won't owe any additional money, but you will no longer be covered. 

No cash value 

Term life insurance does not include a cash value component like whole life insurance does. Cash value can provide a source of liquidity over time that you can access during your lifetime.

How term lengths work 

Term life insurance policies are typically offered in two main categories: level term and annually renewable term. Level term policies tend to last for a set number of years like 10 or 20 (although depending on the company, you may be able to get policies with different time lengths). As the name suggests, what you pay for a level term policy remains the same each year. Annually renewable term policies typically last until you reach a certain age. The cost of an annually renewable term policy will increase over time. 

When consider a term life insurance policy, it’s a good idea to think through the following: 

Amount of coverage needed 

Consider all of the financial obligations you would want covered if you died during your policy's term. These can include your childrens’ educations, support for a nonworking spouse, mortgage payments or other unpaid debt. 

Length of time you'll need your death benefit 

If you have children that you plan to support until they are financially independent, you'll have to estimate when that will be. For some it may be until college graduation, and for others it may take longer. 

If you have a spouse or aging relatives you support, you’ll likely want to consider a longer term or whole life insurance. Even with a working spouse, you may still need to replace your income in order for your family to maintain the level of financial security they are used to. 

Future sources of funds 

How much retirement planning have you and your spouse done? The fewer sources of retirement income you have, the more coverage you may need to support the other if one of you passes away. 

Converting term to whole life insurance 

When you buy a term life policy, it may include the option to convert to whole life insurance. This option lets term policyholders enjoy the benefits of a whole life policy without undergoing a new medical exam. 

It's best to do this as soon as you can, because there may be time limits for when certain conversion benefits are available.  

Second, premiums will likely be based on your age at the time that you convert, so the sooner you make the change, the more permanent death benefit you will be able to acquire for a given premium amount.  

Finally, the sooner you convert, the longer your cash value has to grow. Like all things that involve compounding interest, the longer the time horizon, the better the appreciation. 

What is whole life insurance? 

Whole life insurance is a type of insurance policy that lasts for your entire lifetime, paying a death benefit to your beneficiaries when you die, and providing a cash value component that you can access for any reason during your life. Some whole life insurance policies also pay dividends that can be used to increase the value of your policy, to reduce your premiums or taken as cash. 

Benefits of whole life insurance 

Lifetime coverage 

Whole life insurance lasts for your full lifetime. As long as you pay your premiums, your beneficiaries will receive a death benefit, no matter when you die. 

Cash value 

As you pay for your policy premiums over time, your whole life insurance policy will grow cash value. Over time, this can become a significant amount of money that you can access for any reason (although doing so could lower your death benefit).  

Dividends 

Some insurance companies may pay dividends on whole life insurance policies, which can be taken as a distribution or used to increase the value of your policy (While a dividend is not guaranteed, Northwestern Mutual has paid a dividend every year since 1872.)  

Limitations of whole life insurance 

Higher premiums 

Whole life insurance premiums are higher than term life premiums for the same death benefit. If you're on a tight budget and want whole life insurance, you may have to go with a smaller death benefit versus what you would get with term life insurance. 

More complex than term 

Term insurance is pretty basic, but whole life and other forms of permanent life insurance have extra features to consider. Depending on your policy, your cash value may grow at different rates, or how dividends are paid out can differ by company. That’s why it’s a good idea to consult a financial advisor to talk through your options before choosing the best policy for you. 

Whole life insurance cost ranges 

The cost of getting whole life insurance, like all life insurance, goes up as you get older or your health changes. Gender also plays a role: women live longer than men on average, so women are considered less risky to insure and tend to pay lower premiums than men for the same policy. 

The best way to get as low a premium as possible is to apply for a policy at a young age. A woman who applies for a whole life insurance policy at age 30 could pay as little as $1,200 per year for a $100,000 policy. The same woman would pay more than double that amount if she waited until age 50 to get whole life insurance.¹ 

How to choose the right life insurance for your budget, family and future 

Life insurance is an essential part of a comprehensive financial plan. Your policy should always be personalized for your circumstances, taking into account your dependents, your financial situation and your health. When you compare whole life insurance vs. term life insurance, you'll want to consider all the following factors: 

• How much of a death benefit do you need?  

• How long will your dependents need financial support?  

• How much can you afford in premiums?  

• Will you benefit from having access to the cash value in your life insurance policy?  

• Are you in good health? 

You’ll also want to balance different aspects of your financial plan, including life insurance, retirement contributions to accounts like an IRA or 401(k) and an estate plan.  

A Northwestern Mutual financial advisor can help compare the pros and cons of whole life insurance to those of term life insurance and help you choose the best policy to meet your needs. Northwestern Mutual also offers a variety of whole life insurance policies—ones that consistently pay attractive dividends year after year. Connect with a financial advisor to learn more.  

Utilizing the cash value through policy loans, surrenders, or cash withdrawals will reduce the death benefit; and may necessitate greater outlay than anticipated and/or result in an unexpected taxable event. Dividends are not guaranteed. 

1Rates are for a 30- and 50-year-old female, best rating class, using Whole Life Plus 100