Term life insurance is the best choice for most young people, but whole life insurance has its benefits too, including added cash value and investment perks. Learn which type of policy is smartest for you.

Before you start shopping for life insurance, it helps to already know your answer to providers’ #1 question: Do you want term or whole life insurance? 

Both term and whole life insurance provide your beneficiaries with a payout if you pass away, but they differ in other respects. The right fit for you depends on your investment goals, budget for premiums, beneficiaries’ financial and medical needs, and other questions only you can answer. 

Here’s what you need to know and ask when trying to decide which to choose.

An overview of term vs. whole life insurance

Both types of life insurance usually offer level premiums, which means your monthly payments will remain the same for as long as you hold the policy. If you keep up with your payments, both policy types guarantee your survivors will get a death benefit — an amount they’ll receive if you die and they need to make a claim. 

The three biggest differences between term life insurance and whole life insurance are: 

  • Expense. Term life insurance is much cheaper than whole life insurance in just about every situation.
  • Coverage length. Term life insurance covers you for a temporary “term” or time period. The coverage length for whole life insurance is right in the name; it lasts your whole life. 
  • Cash value. Term life insurance provides a cash payout only in the event of a policyholder’s death. Whole life insurance policies grow extra cash value in addition to the death benefit, so they can double as investment vehicles.
 BenefitsPolicy value rangesMonthly premium rangesLength of policy
Term life insuranceDeath benefit only$100,000-$1 million+*Approx. $15-$11710-30 years
Whole life insuranceDeath benefit and cash value$50,000-$1 million+Approx. $350-$520Life

*Some term life insurers may offer smaller policy values (like $25,000), but these ranges are typical of what most companies offer.

What is term life insurance?

Term life insurance is simpler than whole life insurance, and is in some ways comparable to car or home insurance.

  • With term life insurance, you pay premiums either every month or every year.
  • Insurance can usually be bought for periods of 10 to 30 years. If you die during your policy, your beneficiaries can make a claim. But if you outlive the policy, the coverage ends and no payout will be made.
  • Premiums are based on many factors, including age, overall health, and term length.
  • The premium usually won’t change for the life of the term. Once your term ends, however, your premiums will increase if you want to take out a new policy (since you’ll be older). 
  • New policies tend to be fairly cheap for healthy people under 50, then get progressively more expensive.
  • All policies require applicants to submit some health information, and many insurers (though not all) require a medical exam. Depending on your policy specifics, you may or may not need another exam if you renew coverage.

Term life insurance policies are particularly popular among mortgagers and parents of young children, because the death of a policyholder could result in a substantial loss of income that would jeopardize mortgage payments, child-rearing expenses, or funds for college. The policy’s death benefit is a form of financial security against that lost income.

A policyholder who no longer has these financial concerns, e.g. they’ve paid off their mortgage or saved up enough for their children’s college tuition, might have no need to renew their term life insurance policy once it expires.

Read more: Buying life insurance young saves money

Variations on term life insurance

  • Return-of-premium term policies give back some of your premiums at the end of the term. Note that these policies are generally more expensive.
  • Convertible policies can be turned or “converted” into whole life policies at the end of the term. These can also cost more than average term policies. 
  • Decreasing term policies decrease the death benefit gradually over the course of the term. These policies are helpful for covering time-bound obligations like a mortgage. 
  • Policy riders are features tacked onto term life (or whole life) policies for an additional fee. For example, you can add a child to your coverage, or opt to increase coverage if you die in a qualifying accident.

What is whole life insurance?

Whole life insurance is the most common type of permanent life insurance. Aside from the guaranteed death benefit, a portion of each paid premium accumulates into an additional cash value, which is available for you to borrow against or cash out during your lifetime. Some other notable features of whole life insurance include:

  • Premiums are charged monthly, quarterly, semi-annually, or annually. You can usually pick your payment schedule.  
  • Some policies also pay dividends, or an annual cash payment to investors as your investment grows. 
  • Beneficiaries receive the entire death benefit – also referred to as the “face value” of the policy – minus any unpaid loans taken from the cash value. The rest of the cash value reverts to your insurance company when you die (it doesn’t automatically pass to beneficiaries). 
  • Since beneficiaries don’t get the cash value, this value is primarily for the policyholder to invest or borrow from while they’re still alive. This can be useful for people who don’t have dependents but still want life insurance.
  • You can surrender a whole life insurance policy if your financial circumstances change or you have buyer’s remorse. You’ll get back the policy’s cash surrender value, but you may be charged fees. 

Due to their cash value and length of coverage, whole life insurance premiums are significantly more expensive than term life insurance premiums. Premium quotes can be ten times or higher than what you’re quoted for term life, for policies that otherwise have the same death benefit. 

Read more: Is whole life insurance a good investment?

How can you use cash value?

You can use a policy’s cash value buildup to pay premiums, get an emergency loan, save it for retirement, or liquidate it by canceling the policy. Returns on a whole life policy may be comparable to high-yield investments after about 20 years.

Universal and variable life policies

People who want to take advantage of whole life insurance’s investment component can consider universal or variable life policies, which are variations on permanent life insurance.

Universal life insurance policies earn interest at the market rate, so your money’s working for you as well as your beneficiaries. And once you’ve held the policy for a while, you may be able to adjust your premium payments. 

Variable life insurance policies let you invest a portion of your policy into stocks, bonds, or mutual funds. This is a good option if you’re already comfortable with investing and willing to assume some risk (if your investments don’t perform well, the death benefit could decrease). 

Pros & cons of term life insurance

Pros of term life

  • The premiums are much more affordable for the same death benefit. 
  • You can cancel with no penalty after purchase. 
  • Since you’re not investing, there’s no investment risk.

Cons of term life

  • Coverage will run out after the term, so if you still want life insurance, you’ll have to buy a new, pricier policy. 
  • Qualification may involve a lot of steps, including a health exam.

Pros & cons of whole life insurance

Pros of whole life

  • Coverage doesn’t expire.
  • Cash value growth is tax deferred.
  • Dividends, if your policy provides them, are tax free.  
  • Premium costs don’t change even if your health declines in the future.

Cons of whole life

  • Higher premiums are outside many young people’s budgets. 
  • Cash value usually doesn’t earn a lot of interest compared to other investments. 
  • There are fees for canceling coverage. 
  • If you take out loans from the policy and don’t pay them back, the loan amount is subtracted from the death benefit.

How much life insurance do you need?

Singles with no dependents probably only need a small life insurance policy. $50,000 or even $25,000 may be enough. Since there is no one else who will rely on the income, it’s basically a matter of having enough insurance to pay for final expenses (death) and any lingering obligations. The benefit here is you get a permanent policy, with fixed premiums. 

A family with young children, on the other hand, would need coverage to support dependents for several years. In this situation, a $500,000 life insurance policy might be the absolute minimum. For example, it would provide $20,000 for final expenses, $20,000 a year in financial support for the next 15 years ($300,000), and the remaining $180,000 to be used for your children’s education.

Since it will be much more expensive to have a larger amount of life insurance coverage, a young family can save on costs by choosing term life insurance. On the other hand, if you have a beneficiary who may require financial support for their entire life — like a child with special needs — a whole life insurance policy can help you set them up with permanent security.

One simple way to determine how much coverage your family needs is to multiply your current salary (pre-tax) by the number of years your beneficiaries will rely on the death benefit. If you’re a new parent who makes $40,000 a year, and you want 20-year coverage so your child is covered until they turn 20, you could look into an $800,000 policy. If you make the same salary but you want insurance to cover a 30-year mortgage, that puts you in the $1,200,000 range. 

Read more: Calculate how much life insurance you’ll need

How long do you need coverage?

Covering final expenses is a permanent insurance need. If that’s your only concern, a small whole life policy will get the job done.

Term life insurance tends to be the more cost-effective solution when you can match the term of the policy with the length of time it will take you to pay off your debt. For example, if you’re raising a family and/or trying to pay off a mortgage, you may need a large amount of coverage for a period of 20–30 years. 

After the initial term expires, you can opt to:

  1. Continue coverage at a higher premium,
  2. Lower the death benefit amount and therefore the premium, or
  3. Cancel the policy completely.

As a general rule, unless you anticipate needing coverage for longer than 16 years (and you’re able to pay higher premiums the whole time), stick with term. The 16-year mark is about when a whole life insurance policy’s cash surrender value plus insurance value will catch up to your initial investment. Cancel the policy any earlier and you risk losing money. 

Read more: Life insurance: Is it worth it and when do you need it?

What should I choose: Whole life or term life insurance?

It is often said that the best strategy is to buy term life insurance and invest the difference. Let’s break down what that means:

If you buy an inexpensive term life policy, you’re theoretically saving money compared to what you would have spent on a pricier whole life policy. You could then take the difference of what you would have paid for whole life insurance and invest it in an index fund. In this scenario you will generally have more money at the end of many years than you would have accumulated from a whole life policy.

Another general rule of thumb is that a large family may want to check into term insurance, and a single person — with no dependents — might benefit more from whole life insurance. However, this can vary depending on a variety of factors.

Who should buy term life insurance?

For most young people, we suggest basic term life insurance. It’s straightforward and inexpensive, and could leave you more money left over to invest for retirement and other goals.

Term life insurance is the best choice if: 

  • You want insurance to cover a specific, temporary financial need. 
  • Affordability is your top priority. 
  • You won’t need coverage indefinitely. 
  • You aren’t planning on using the policy for investment. 
  • You might want a permanent policy in the future, but the premiums are out of your price range now. (It’s easier to switch from term life to whole life than it is the other way around)

Read more: How to get the best price on term life insurance

Who should buy whole life insurance?

In some cases, if you’re looking for insurance that provides tax benefits and an additional return on the money you’ve paid in, you might consider a whole life insurance policy. 

Whole life insurance is the best choice if: 

  • Funding a trust or covering funeral expenses is your highest priority.
  • You can afford higher premiums for several years. 
  • You’re interested in building cash value and using life insurance to invest.
  • You’ll have long-term dependents. 

If you go with whole life insurance, you’ll lock in a better rate at a young age than you will when you’re older. And if you don’t have an orientation toward saving money, a whole life policy can prevent you from blowing through the savings intended for your investment.

Where to find term or whole life insurance

Reviewing a number of life insurance quotes is the best way to get a competitively-priced premium for the type of insurance and coverage levels you need. You can find a good term or whole life insurance policy by either approaching a reputable insurer directly, or working with an insurance broker, which partners with many different insurers.

Here are examples of both:

Policygenius

Policygenius, an independent insurance broker, allows you to compare term and whole life insurance plans from different providers. After you enter some basic personal and medical info (age, height, weight, etc.), Policygenius provides multiple quotes for you to review.

Policygenius has paired up with Brighthouse SimplySelect℠ to offer policies (up to $2 million in coverage) that don’t require a medical exam, and all you’ll need to do is answer an over-the-phone questionnaire with a Policygenius agent. According to Policygenius, your premiums won’t increase if you don’t take a medical exam (which is an uncommon perk).

Get a life insurance quote with Policygenius or read our full review.

Bestow

If you’d like to compare the quotes you’re given by an insurance broker with offers from a direct insurer, Bestow is a great starting point.

Bestow offers term life insurance policies for 10, 15, 20, 25, or 30-year terms, and coverage amounts range from $50,000 to $1.5 million. The application process is very fast — you can apply entirely online, without getting a medical exam. Bestow is available in every U.S. state except New York.

Get a term life insurance quote with Bestow or read our full review.

Read more: Best life insurance companies

Frequently asked questions about term vs. whole life insurance

What happens if you outlive your term life insurance?

Once a term life insurance policy ends, it’s done — there’s no payout unless you choose a policy that returns some of your premiums. 

You’ll probably have the option to renew for another term, but you’ll pay higher premiums than you did before. If you want more coverage, it may be worth shopping around to see if another insurer offers lower premiums.

Can you switch from one kind of policy to another?

Yes, you can switch from one kind of life insurance policy to another.

Changing from term life to whole life is the easier option (which is one reason why term life is typically the best choice for most young people). Your term policy may have a set time period during which you can switch from term to whole life coverage (a conversion period). Conversion policies are worth considering if you have health conditions that would raise your premiums on a new life insurance plan. 

Changing a whole life to a term life policy is also possible if you’ve built up cash value. Your insurer can take the accumulated cash value and use it to cover the length of the term you choose.

What happens if you cancel your life insurance?

If you bought a term life insurance policy you no longer need, terminating the policy should be as simple as stopping premium payments. You won’t get any money back, but you won’t lose any investment value either. 

Before you cancel a whole life policy, ask your insurer for the cash surrender value (the cash value minus any fees the insurer charges for surrendering the policy). Otherwise the insurer will use any remaining cash value to keep paying premiums.

Summary

When you’re considering buying life insurance, I recommend that you avoid the ‘which is better debate’ entirely. Instead, focus on your own needs, circumstances, and financial habits. This is what will really help you determine which is the right type of policy for you.

Compare quotes from over a dozen insurance carriers

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Amy Bergen Writer
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Amy Bergen is a writer and editor based in Portland, Maine. She's interested in technology, literature, and how the world will change in the future. You can reach Amy on LinkedIn, Twitter, or Facebook.