Term vs. whole life insurance, in plain English

Key points

Term life covers a set number of years and usually costs the least per dollar of coverage.
Whole life lasts your whole life and builds cash value, but premiums are much higher for the same death benefit.
Start with how long people depend on your income, then pick the policy that covers that period.

Life insurance pays a lump sum, called the death benefit, to the people you name if you die while the policy is active. The two main kinds, term and whole life, solve different problems. Knowing which problem you have makes the choice easier.

How term life works

A term policy covers you for a fixed period, commonly 10, 20 or 30 years. Premiums are usually level for the whole term. If you die during the term, your beneficiaries are paid. If you outlive it, the coverage ends and nothing is paid out.

Because most term policies never pay a claim, they cost far less than permanent coverage for the same amount. That makes term a common fit for covering a mortgage, raising children, or replacing income during your working years.

Some term policies can be renewed each year after the term ends, at a much higher price, or converted to permanent coverage without a new medical exam. Ask whether a policy has a conversion option and until what age.

How whole life works

Whole life is a type of permanent insurance. As long as you pay the premiums, it stays in force for life. Part of each premium builds cash value that grows at a rate set by the contract. You can borrow against the cash value or surrender the policy for it, though loans and withdrawals reduce the death benefit, and surrendering early can mean getting back less than you paid.

Whole life fits needs that do not end, such as covering final expenses, leaving money to heirs, or providing for a dependent who will need support for life. Other permanent policies, such as universal life, offer more flexible premiums but come with their own trade-offs.

Side by side

	Term life	Whole life
How long it lasts	A set term, such as 10 to 30 years	Your whole life, if premiums are paid
Cost for the same coverage	Lower	Much higher
Cash value	None	Yes, grows over time
Common use	Income replacement, mortgage, raising kids	Lifelong needs, final expenses, estate planning

How much coverage do you need?

A rough rule of thumb is several times your annual income, but a simple tally gives a better answer. Add up:

Income your family would need to replace, for the number of years they would need it
Debts you would not want to leave behind, such as a mortgage
Future costs such as childcare or college
Final expenses

Then subtract savings and any existing coverage, including life insurance through work. Employer coverage often ends when you leave the job, so many people do not count on it alone.

Comparing life insurance?

See life insurance options

What affects the price

Insurers price life insurance mainly on age, health, tobacco use, family medical history, coverage amount and term length. Many policies require a medical exam or access to health records. Policies with no exam are available and faster to get, but they often cost more or cap the coverage amount.

Questions to ask before you buy

Is the premium guaranteed to stay level, and for how long?
Can I convert this term policy to permanent coverage? Until what age?
For whole life: what is the guaranteed cash value in year 5, 10 and 20? What do I get back if I surrender early?
Is there a waiting period, or any exclusions in the first two years?

The bottom line

If you need coverage for a defined period, term life is usually the most affordable way to get a large death benefit. If the need lasts a lifetime, permanent coverage may be worth the higher cost. Many people use term for income replacement and a smaller permanent policy for final expenses. If you are focused on that second need, read our final expense guide.