Term Life Insurance vs. Whole Life Insurance

The main difference between term life insurance and whole life insurance is that term life insurance serves as insurance only, whereas whole life insurance is actually insurance plus investment.

A term life insurance policy has 3 main components - face amount (protection or death benefit), premium to be paid (cost to the insured), and length of coverage (term). The policy expires at the end of the term. If the insured person dies during the term of the policy, the beneficiary is paid the benefit (face) amount. If the insured person is alive after the term (duration) of the policy, no benefit is paid and the policy expires. So in a sense, it is like car insurance, where if you have a six-month policy and you get into an accident during this period, you get compensation from the insurance company. But at the end of the period if no accidents happen, you do not get any money back.

Whole life insurance on the other hand is a form of permanent life insurance, which means that in addition to insurance, the policy also has a savings component. A part of the premiums paid by the insured person goes towards insurance, while the remainder is invested and builds a "cash value". If the insured lives beyond the policy expiration, the cash value is paid out to the insured. The cash value can also be used to borrow money against. The cash value is invested (in bonds and stocks or money-market instruments), and therefore there is a gain. This gain is tax-deferred if the policy is cashed in during the life of the insured. (If the insured person dies, the proceeds are usually tax-free to the beneficiary.)

Comparison chart

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Term Life Insurance

User Rating (76):

Whole Life Insurance

User Rating (118):
Factors to consider Benefit amount, Premium, length of term. Payout, Premium, Policy cash value, participating/non-participating.
Definition An original form of life insurance and considered to be pure insurance protection in which death benefit would be paid by the insurance company if the insured died during the term, while no benefit is paid on maturity of the term. A life Insurance plan with an unspecified period, under which the death benefits are paid on death whenever it may occur.
Payment Death benefits are paid only on the death of the insured during the policy term. Death benefits paid on death (in full) up to age 100 or 120.
Premium Inexpenstive form of insurance, very low premium as policy may expire without paying out. Higher premium as whole life insurance plans must always pay out eventually and builds a cash value
Types Types of term life insurance include annual renewable and guaranteed level Whole life insurances are of different types: non-participating, participating, limited pay, single premium.
Advantages Term insurance is less expensive and affordable. Level premiums distributed throughout life of insured and more affordable.
Policy Duration Common terms are 10,15, 20 or 30 yrs Whole Life

edit Cost of a Term vs. Whole Life Insurance Policy

Whole life insurance policies are a lot more expensive than term policies. Moreover, often there are hidden costs in whole life insurance policies such as:

edit How to Choose

These are some of the factors to consider when choosing between a term life or whole life insurance policy:

Suze Orman vehemently advises a viewer against whole life insurance. Find out why:

edit References

  1. http://en.wikipedia.org/wiki/Term_life_insurance
  2. http://en.wikipedia.org/wiki/Whole_life_insurance
  3. http://en.wikipedia.org/wiki/Life_insurance#Types_of_life_insurance

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