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Term Life vs Whole Life Insurance [We Pick the Winner]

whole life vs term life insurance

Here we go! The age old battle between term life vs whole life. Throughout history financial experts have argued over which type of coverage is superior. One faction screams, “Buy term and invest the rest!” or “Whole life is a bad investment!”

The sad reality is, many in both the financial market and insurance market have embraced the idea that the only life insurance worth it is term life. But is there another side of the story?

Our goal in this article is to help dispel the lies and misinformation as we attempt to demystify the misguided argument between term life vs whole life insurance.

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Difference Between Term and Whole Life Insurance

Before we launch into discussing which is better, whole life vs term life, we need to define what both are, as well as point out some pros and cons of term and whole life.

Whole Life Insurance

As perhaps one of the most popular types of permanent life insurance, whole life, also known as ordinary life insurance, is a policy that provides lifelong coverage and will only come to an end after the death of the insured. When death occurs, the death benefit will be paid out to the beneficiary, generally in a lump sum payment.

Most people focus only on the death benefit…

However, with whole life insurance, there is also a second side which is cash value accumulation in the policy. Over time, this amount will grow and you can even borrow money against the cash value tax free.

Being able to borrow from the carrier at anytime using your cash value as collateral is a game changer. If you are not familiar with the infinite banking concept®, bookmark your spot in this article and take a moment to familiarize yourself.

Whole Life Insurance comes with Four Fantastic Guarantees
Guaranteed Fixed Premium

Throughout the life of the policy the premium is guaranteed to remain exactly the same. Different whole life policies offer varying lengths of time to pay into the policy, including limited pay life insurance. Some options are 10 Pay, 20 Pay, Life Paid Up at age 65  or 65 Life, and Life Paid Up at age 100 or 100 Life.

Guaranteed Interest Rate

Our recommended companies offer a guaranteed interest rate return on the cash value in the policy. Currently the guaranteed interest rate is 4%, which does not include potential growth through life insurance dividend payments.

Guaranteed Cash Value Growth

The cash value in the policy grows with compound interest. The cash value grows due to the guaranteed interest rate credited by the insurance carrier and also through dividends paid in participating whole life policies.

As a side note, consider purchasing a participating whole life insurance for your children. The policy premiums will be low and the policy will make an excellent resource for your kids, especially if you teach them how to maximize the policy via strategic self banking.

Guaranteed Death Benefit

The death benefit will always be guaranteed assuming that the premium payments are made. On a properly structured policy the death benefit will actually INCREASE as you age. Think about this for a moment, as you get closer to death your death benefit actually goes up.

Guess what happens to your death benefit with term life? Nothing, because the older you get with term the more it costs and the less likely you will be to keep it in place.

Participating Whole Life Insurance

The best participating whole life insurance companies will also offer dividends to policyholders each year. The dividends can be used for a variety of things, but primarily the best use of whole life dividends would be for:

  • Spending the cash,
  • Premium reductions, or
  • Purchasing paid up additions
What’s a Paid Up Addition?

A paid up addition is a rider that allows you to buy paid up life insurance and accompanying cash value equivalent dollar for dollar on what you paid into it. It is pretty awesome. Essentially, your cash value and death benefit are INCREASING. So the older you get, the larger your death benefit as you move towards that inevitable day.

Whole Life Summary

So that about covers it when it comes to defining whole life insurance and the pros and cons associated with it.

Now some of you reading this might be saying, that is not the whole life insurance I have heard about. Ya, we know.

More on that below but for now just remember this, there are many types of whole life policies. The way you design your policy matters greatly and can mean the difference between a headache and a legacy.

Term Life Insurance

Otherwise known as ‘pure’ life insurance, it should really be called “death” insurance, since the primary benefit is to provide for your beneficiary when you die.

Term life is often chosen by the younger generations as a protection just in case one was to die early. Just like we saw with whole life insurance, the death benefit works in exactly the same way in that it will be paid to the beneficiary as long as the insured passes away within the dates of the policy, i.e. the contract.

Term life insurance typically has no cash value, although some ROP (return of premium) term policies may have a little cash value accumulation.

The duration (i.e. the term) of the policy can vary somewhat with some insurers offering one year (called annual renewable term) all the way up to 30 years. Normally, you will see opportunities at five year intervals between 5-30 years, with at least one company offering the ability to tailor your policy in yearly increments from 15 year terms to 30 year terms, i.e. 16, 17, 18, 19, etc.).

For the most part, people tend to opt for a 20 year term. This is due largely to the fact that those who buy term are usually younger and there is not much difference between the price on the 15 year and 20 year term policy so they just pick the longer term.

Level Term Life Insurance

Most term life offered is level term. With level term life the premiums will stay the same for the duration of the term.

However, there are companies out there that offer 5 year term products based on age brackets where the premiums increase every five years.

It is important to read the fine print to determine if the policy you are considering is fixed premiums or if the premiums increase every year or every five years.

Some term life is better than nothing at all…

Although term life insurance isn’t necessarily required insurance for young adults who are still living at home and have no family to look after, experts believe that responsible parties should take out a policy as soon as someone becomes dependent on them.

For example, if you had your parents co-sign on your student loans, then getting a policy would be the kind thing to do so you don’t leave them with the debt. And before you say that student loans are forgiven on death, read the fine print. Just because the loan is forgiven does not stop the IRS from counting the forgiven loan as income for that year. Thank you, Uncle Sam.

Another example would be if you have a spouse and child that rely on your income, a policy would ensure that your income is replaced for a certain amount of time should you unfortunately die prematurely.

If you’re just looking to cover your mortgage or until your child is old enough to be living on their own, you can choose term life insurance that lasts this amount of time, either until the child is old enough for independence or to cover the duration of your mortgage.

Expert tip: For anyone that sees the value of whole life insurance, you can always buy your term life policy from one of the best dividend paying whole life insurance companies.

Make sure the policy is convertible term life insurance that can be converted to the type of permanent coverage you desire to one day own and you can simply defer getting your whole life policy until later. But you will be locked into a policy, so that if you do get struck with some sort of life altering sickness, you can convert your term life to whole life with no proof of insurability.

No proof of insurability

This means you will not have to take a life insurance blood test or answer health questions. You simply let the company know you want to exercise your right to convert your policy from term to whole life, and voila, there you go!

There is some paperwork involved. But if you have contracted a deadly disease the insurance company cannot deny you the option to convert your policy. Once again, we emphasize the importance of choosing convertible term with a company that offers a decent policy to convert to.

Pros and Cons of Term Life vs Whole Life

What are the main differences between the two, including the pros and cons, and what should you keep at the front of your mind when choosing the right policy for you and your family?

Choice of Length

The typical argument on term vs whole life regarding how long each lasts goes something like this:

Term life insurance allows you to choose the length of your policy while whole life will last until you die. When deciding which one to go for, you have to assess your needs and for what the death benefit will be used. If it will always be needed regardless, whole life insurance may be the better option. Term works for those on a limited budget. However, you will have to renew or find a new policy if you outlive your term life insurance and your premiums will almost certainly increase because you will be older.

This is a good argument pro and con both types of life insurance policies. Term is less expensive originally but term becomes cost prohibitive the older you get. Whole life is more expensive up front but over time the premiums may stop or be covered via the dividends. In other words, with whole life you can keep the coverage until you die and you probably won’t pay premiums on the policy later in life, particularly if you chose limited pay life insurance.

Winner: whole life insurance

Low Annual Premium

The typical argument in favor of term goes something like this. Buy term and invest the difference. This life insurance meme was probably started by Dave Ramsey ranting against whole life insurance, or perhaps some other financial entertainer, but it has taken on a life of its own.

Anyway, the premium payments are likely to be a huge factor within your considerations so it is important to know that whole life insurance will be the more expensive of the two, INITIALLY.

With term life, one of the major pros cited by so called experts is that it is a more basic coverage and it only lasts a certain amount of time so the initial premiums will be lower.

However, there is a trade-off to consider because whole life insurance can also be affordable when young, depending on where you are financially. (A good argument can be made to choose whole life insurance for children.)

So if you choose term life now and then renew later down the line, you will be left with higher premiums because you will be older and you could even have certain health issues that make it difficult, if not impossible, to qualify for additional coverage.

Contrast the pros of term with the pros of whole life regarding the amount of premium paid annually. With whole life you lock into your premium.

A properly structured policy will maximize your cash value and allow you to access it quickly, if necessary.

When you are young, your whole life policy premium probably runs around the monthly cost of netflix or your cell phone bill. But what you gain is insurance that acts as an asset and that will grow in cash value and death benefit over time and allow you easy access to the funds for investments, paying off debt, or retirement planning.

Winner: whole life insurance

Cash Value

Another whole life insurance pro is that whole life is the only one with cash value that builds over time that can be withdrawn or borrowed against via a policy loan.

If you need basic coverage and have no need for cash value, or the premiums are initially too high, term life insurance is the way to go.

But bear in mind that you will receive nothing in return. You are simply “renting” life insurance with term life.

Over time, the cash value of your policy can be useful, especially for specifically tailored whole life policies designed for the purpose of employing the infinite banking concept.

Winner: whole life insurance

Buy Term and Invest the Difference

First, realize that not one of your investments outside of life insurance offer the leverage of a death benefit. That is one primary reason why life insurance is a good investment.

Second, all your realized gains with whole life are not taxed each and every year. However, with buy term and invest the difference, your realized gains (i.e. when you sell) and any dividends received are going to be taxed every year.

Third, without even going into the argument that proponents of buy term and invest the difference greatly exaggerate what the returns will be (who gets 12% returns anymore?) on the money that is invested, this idea fails primarily due to one major reason: no one actually does it!

That is, no one actually buys term life and computes out the difference saved between term and whole life, and then uses that figure to invest with. Just like most tired cliches, it makes a great sound bite but it lacks any substance once you scratch below the surface.

Fourth, when you invest the difference, where are you sticking it? With whole life, policy withdrawals are tax free up to your basis in the policy. However, there are so many rules and regulations on early withdrawals of IRAs and 401k withdrawals.

Plus, who do you want holding your money, a mutual insurance company or a mutual fund company? Remember the crash of 2008? MassMutual came out unscathed but where is Lehman Brothers?

Instead of buying term and investing the difference, why not buy whole life and use your cash value to invest with, while also receiving guaranteed return and dividends on your cash value? That way your money is working for you in two places at once.

Winner: whole life insurance

Investment Risks

One more thing about buy term and invest the difference. Just know that with whole life, your return is GUARANTEED. That is another reason whole life insurance is a good investment.

What about your investment with the “difference” you saved by choosing term life vs whole life? Ya, you guessed it, the investments you choose are not guaranteed. You assume all the investment risks. And with the stock market at an all time high, it is simply a matter of time before a sizeable correction occurs. Buyer beware!

Winner: whole life insurance

Guaranteed Death Benefit

As long as you keep up with the premium payments and you don’t cancel the policy early, there will be a guaranteed death benefit on both term and whole life.

With whole life insurance, you have to remember to pay back the life insurance loan and interest, otherwise this will have an impact on the death benefit. With term life, you have to remember to plan on converting the policy or self insure.

Self insure: figure out some way to leave behind money to your family when you are gone apart from life insurance. Self insuring is not a good plan considering the leverage you get with life insurance, the tax benefits, and the ability to earn true compound interest on your cash value.

Winner: whole life insurance

Future Insurability

Whole life insurance guarantees that you will have coverage no matter what illness or disease comes your way. With term life, you run the risk of being uninsurable down the road. Granted, term life insurance typically has a conversion option, which will allow you to convert your policy to a permanent life insurance.

But converting the policy will increase the cost of your premiums. Plus, very seldom do we see people actually exercise the conversion option. Instead, the term ends and the individual tries to get a new policy, only to find out the soreness in his chest he has been experiencing is actually coronary artery disease and he is now uninsurable.

Winner: whole life insurance

Consistent Premiums

When people research life insurance, one of their biggest concerns seems to be that they don’t want the premiums to increase over time. However, both term life and whole life insurance will have fixed premiums over the duration of the policy.

Although they will differ from one policy to the next, each policies premiums will remain the same (i.e. fixed) after being set up.

But what pushes the needle over towards favoring whole life over term life is that with whole life, either dividends or the cash value can be used to pay premiums. So even though both policies allow for fixed premiums, one is superior in that it can also pay for itself via past premiums paid into the policy.

Term life does not offer this flexibility, and if you don’t pay your premiums, or can’t pay your premiums, with term life you are out of luck, the policy will lapse and you will lose your coverage.

Winner: whole life insurance

Annual Dividends

Finally, whole life insurance, not term life, will be eligible for annual life insurance policy dividends and it is only a certain percentage of whole life policies that pay dividends to policyholders. Ultimately, it has to be a participating whole life policy. With term life insurance, this option will not be available regardless of the carrier.

Winner: whole life insurance

Whole life vs Term Life: Factors to Consider

Now you know all about the two policies, what about yourself? Later, we will be taking a detailed look into the price comparisons for different age groups but what should you take into consideration about yourself when making this big choice? In truth, there are a number of different variables that will affect your decision between whole life and term life.

Age – Your age will be a huge factor in this decision. Not only will it decide the price of your premiums, it may affect how long you think you need the insurance for. If you are young, whole life insurance will be more affordable than when you are older and term life insurance presents a risk because you have a high chance of outliving it.

Age of Children – After your own age, the age of your children should also be considered because you may just be trying to protect them and ensure that there is some money available should the unthinkable happen. If they are already in their teenage years, you may only want a short term life policy with maximum death benefit.

Health – Health is a factor because good health will help you get the best rate class, which equals lower premiums. However, what you might not be aware of is whole life insurance is often EASIER to qualify for than term life for those who have an existing health conditions.

Family Financial Needs – If you find yourself and your family in the rat race and you are wondering how you will ever break free, we once again introduce you to the infinite banking concept and the vast implications it can have for your future financial freedom.

Estate Planning – As you can imagine, life insurance is now heavily involved with the estate planning process because it provides a source of liquidity in the form of cold hard cash after you die. Not only does it give the beneficiary an opportunity to pay expenses, the death benefit is tax-free in most cases.

Likelihood of Outliving – If you are still relatively young, one of your main concerns should be the fact that you will probably outlive your term policy. In fact, some stats show that 98% of term policies expire. The question comes down again to ownership, do you want to rent or own your life insurance?

Miscellaneous – After these main considerations, you may also want to think about your retirement plans, future needs of your children, whether you have a living trust, whether you wish to donate to charity, your mortgage length, and your sources of income for when you plan to retire.

Cost Comparison Between Whole and Term Life

So far, we have spoken about how the costs difference between policies and how they can ‘increase’ but we haven’t actually seen any figures. Therefore, we are now going to delve into the numbers and assess the real difference. To keep it fair, we will go through numerous age groups as well as separating the genders so we can have an accurate overview.

Note: the following quotes are examples only. In no way, shape or form do the following term life and whole life insurance quotes reflect the actual premium YOU will pay for such a policy. If you want accurate quotes and illustrations on whole life insurance tailored to your specific needs, call us or send us an email. 

Male (Whole Life) – With a whole life insurance policy, the costs for a male will depend on two things – age and policy amount. At the age of 30, whole life insurance will normally cost just under $2,400 per $250,000 in coverage. For example, $500,000 coverage is around $4,800 and, for $1,000,000, it rises to over $9,000.

At the age of 40, this changes to $3,500 per $250,000. At the next step of 50 years old, it increases once again to $5,500 per $250,000 of coverage. As you can see, there is a huge jump between the ages of 30 and 50 ($2,400 to $5,500) and this is why the decision is very important.

Male (20-Year Term) – For term life, we have chosen twenty years as this is the most common option and it sits somewhere in the middle which will allow you to gauge other prices. Once again, we start with a male age 30 and a $250,000 policy which will cost around $150 annually and around $250 for $500,000 of coverage and $400 for $1,000,000 respectively.

At 40 years of age, this increases to $210, $350, and $630 respectively. Ten years later, this increases once more to $500, $900, and $1,700. Once again, you can see the huge jump between ages. With a one million dollar policy in place, the premiums jump from $410 to $1700 which is four times the amount for the exact same coverage just twenty years apart. If you haven’t yet looked into life insurance, this is why it pays to do so while you are young.

Female (Whole Life) – In the same way, we will now take you through the same details for a female and there is a slight difference. Compared to the male $2,400 for a $250,000 policy, there is a slight decrease to $2,100 for the 30-year old female and it stays this amount per $250,000 moving all the way up to one million dollars which can be purchased for around $8,000 annually, give or take, depending on the exact policy and features.

At the age of 40, the same female will make payments of $3,000 per $250,000 of coverage and this increases once again when reaching 50 to $4,500 for the same coverage.

Female (20-Year Term) – At 30 years of age, term life insurance will cost a female around $140, $210, and $350 for the three policy amounts of $250,000, $500,000 and $1,000,000. At 40, this is $190, $300, $530. At 50, you will find payments will be around $370, $670, and $1,230.

Term Life vs Whole Life Conclusion 

Earlier, you may have been wondering why we were talking you through the different considerations and this is exactly why.

In truth, there are a number of factors that will affect how much money you pay which is why you need to get it right and you need to get it right early.

Of course, the prices you see above are just estimates based on the average, healthy male and female at the different age intervals.

Ultimately, it was to show you the difference and how big of a role those different factors play.

Lesson: Buy while you are young!

Whole life vs Term Life Insurance Summary 

We know we just overloaded a lot of people’s brain circuits with this long article comparing term life vs whole life. But you should now be in a stronger position to make a solid financial decision for your future, the future of your family,  as well as your legacy.

Before we go, we have a small summary that you can refer back to in the future if required.

Term life may be a good decision if:

  • You are looking for affordable “pure” coverage
  • You are only looking to cover a certain period of time such as raising children or covering a mortgage
  • You can’t afford permanent life insurance currently but still need some form of coverage
  • You are happy to convert your policy to a permanent life insurance policy in the future
  • You don’t need or want the cash value found in whole life insurance
  • You are looking for consistent premiums with no chance of increasing or decreasing

Whole life may be a good decision if:

  • You don’t mind paying more money per month because you can see the value of a properly structured whole life policy
  • You want to provide money in your retirement without worrying about paying additional taxes
  • You are still young and want a policy that will allow you to self finance activities such as paying off debt, investing, buying large ticket items, and supplementing retirement income
  • You want to own your life insurance rather than rent your life insurance
  • You have someone who will be dependent on you for some time to come, perhaps even forever due to special needs
  • You believe that you would outlive a term life insurance policy and want something that will grow over time that has certain guarantees like cash value growth and death benefit
  • You lean towards an abundance mindset

Remember, don’t make a hasty decision that you don’t fully understand. If required, contact a professional who can get to know your unique position and advise you based on your circumstances. The team at Insurance and Estates is standing by ready to serve you to the best of our abilities.

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2 comments… add one
  • John Scott September 1, 2018, 6:24 am

    Thanks for sharing the difference. I say that to everyone that whole life is not a bad investment and neither is term life insurance. It all depends on what you want and what suits you the best.

    • Insurance&Estates September 1, 2018, 7:49 pm

      We would agree with you. There is no one-size-fits-all insurance product or design. Each product must be tailor made to the person’s need and objective.

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