I started Insurance Blog by Chris™ because I have a passion for insurance. Here at the blog, our job is to educate and inform people about the best insurance for them. Since then, we have grown into national brands with a large team of researchers helping people understand all forms of insurance.

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Written by Chris Huntley
Founder of Huntley Wealth & Insurance Services Chris Huntley

Rachael Brennan has been working in the insurance industry since 2006 when she began working as a licensed insurance representative for 21st Century Insurance, during which time she earned her Property and Casualty license in all 50 states. After several years she expanded her insurance expertise, earning her license in Health and AD&D insurance as well. She has worked for small health insu...

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Reviewed by Rachael Brennan
Licensed Insurance Agent Rachael Brennan

UPDATED: Apr 19, 2022

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It’s a great debate among life insurance professionals, consumers, and financial planners:

Term vs. Whole Life Insurance, which is best?

Term life insurance offers low cost protection with guaranteed level premiums for a fixed duration, typically 10, 15, 20, or 30 years. Whole life insurance offers lifetime guaranteed coverage with the additional benefit of accumulating cash values.

While each has its pros & cons, continue reading to find out which could be better for your needs.

Term vs. Whole Life Insurance Calculator

When analyzing term vs whole life insurance, you’ll want to look at several different factors.

We’ll cover how to calculate the differences between term and whole life insurance and help you decide which option is best for your needs.

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What Is Term Life Insurance?

Term life insurance offers low cost protection for a specified period of time, such as 10, 15, 20, or 30 years.

During this time the premiums and death benefit is guaranteed to stay level.

Term life insurance is the most basic form of life insurance and offers a death benefit as its only real benefit (it has no cash value).

How Does Term Life Insurance Work?

Term life insurance is the most basic form of life insurance because it pays death benefits only.

Choosing a term life insurance policy is quite simple as it is 3 step process which includes:

  • Select the amount of coverage (death benefits) you want
  • Choose the length of coverage or term such as 10, 20 or 30 years
  • Choose your beneficiary(s)

RELATED: 5 Critical Tips You Must Know Before Buying Life Insurance

What Is Whole Life Insurance?

Whole life is a form of permanent life insurance.

Whole life insurance also pays out a death benefit upon the death of the insured person.

However, it differs from term in that it offers lifetime coverage with fixed level premiums.

Additionally, it offers the benefit of accumulating cash values.

How Does Whole Life Insurance Work?

Whole life insurance contains 3 components:

  • Premiums
  • Death Benefits
  • Cash Value Accumulation

When you pay your premium, a portion of the premium is applied to death benefits and a portion is applied to the cash value accumulation.

For the first 5 to 10 years the majority of the premiums you pay in these early years of the policy are applied to the death benefits portion (cost of insurance) along with policy fees & commissions.

After this period, the cash value will receive a greater portion of the premium. Another portion of your premium is also used to pay for administrative costs.

Your beneficiaries are entitled to receive only the death benefit portion of the policy when you die. You have no choice in how the life insurance company applies the premium you pay.

You can cash in or surrender your policy at any time. Otherwise, coverage is for your lifetime.

Whole Life Insurance Cash Value

You can cash in either a portion of the cash value accumulation or receive the full amount if you surrender the whole life policy.

The cash value portion is non-taxable so long as it does not exceed the amount of total premiums you paid (the cost basis) when you cash in a portion or surrender the policy. Any cash value in excess of the total premiums paid is taxable.

All you have to do is contact the life insurance company and they will provide you with current values and a surrender/withdrawal form.

You complete the form and submit it to the company. If you surrender the policy, you may receive less than what you paid in.

RELATED: Check Sample Life Insurance Rates by Age (No Personal Info Required)

Pros & Cons of Term Life Insurance

Pros Of Term Life Insurance

  • Term life insurance is the most affordable and the most suitable form of life insurance for the majority of Americans.
  • Term is a fraction of the cost of what you would pay for a similar whole life policy.
  • Term is an excellent choice for:
    • Income Replacement
    • Mortgage and Debt Payoff
    • Business Policies (key man and buy-sell arrangements)
  • The majority of term policies also come with a conversion feature where you can convert your term policy to a permanent policy without a medical exam.

Cons Of Term Life Insurance

  • Term life can be very costly if you have to renew the policy later with age and health issues
  • Policies do not offer any living benefits and have no savings features

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Pros & Cons Of Whole Life Insurance

Pros Of Whole Life Insurance

  • Whole Life provides coverage for your entire lifetime
  • Premiums are guaranteed
  • The cash value accumulation feature is non-taxable, unlike other investment vehicles.
  • You can borrow against the cash value accumulation feature.
  • Many policies offer living benefits.

Cons Of Whole Life Insurance

  • Whole life policies are typically very expensive.
  • Cost is 10X or more than a comparable term life insurance policy
  • Whole life policies are very inflexible as it relates to your premium payments.
  • The cash value accumulation rate is much lower than rates provided through other investment vehicles.

What Happens To The Cash Value Of A Whole Life Policy?

The cash value accumulation portion of any permanent life insurance is only available to the insured person while they are still alive, and is available to borrow against (for which the policyholder will be charged interest) or for withdrawal.

If you have borrowed against the cash value accumulation while still alive, any amount that has not been re-paid, along with interest, will be deducted from the death benefits when you die.

Here’s the real shocker!

What most people don’t know is that when you die the cash value is not payable to your beneficiaries– it is absorbed by the life insurance company.

This applies to all forms of permanent life insurance policies, whether it be Whole Life or Universal Life.

Final Calculations: Term vs. Whole

We believe agents push whole life to their clients to earn high commissions, and consumers continue to buy because the benefits are confusing.

Consumers are made to understand that with whole life, they are getting a blend of permanent life insurance protection as well as some cash value build up that may be able to supplement their retirement.

The problem is 99% of them don’t need permanent coverage. They need term.

We believe that if consumers knew the cost of term life insurance, and what their money could do for them if they were to “buy term and invest the difference,” that far fewer people would buy whole life insurance.