How Whole Vs Term Life Insurance Policies Work Over Time

When you're considering life insurance options, you're planning for how you can best protect the people you love. Depending on what sort of plan you sign up for, the death benefit that life insurance pays to your beneficiaries may not be the only thing that life insurance can offer. Before you choose a life insurance plan, it's important to weigh the pros and cons and fully understand how life insurance works.

Term Life insurance 

Term life insurance is a temporary policy. It covers you for a preset period of time, known as a term. The terms vary from policy to policy, company to company.

How term life insurance works 

Term insurance offers a preset death benefit amount. If you die during the term of your policy, your beneficiaries will receive the full amount of the death benefit.

Level term life insurance 

Named for the premium payments that stay the same for the entire duration of the policy, level term life insurance usually comes with paying higher premiums initially. The advantage is the premium payments don't go up when you're older, so your payments will be stable throughout the life of your policy.

Renewable term life insurance 

Annually renewable life insurance typically offers the highest death benefit at the lowest initial rate, but premiums go up over time. Renewable term policies usually are set to last until you reach a certain age, but may also be cancelled before then.

Whole life insurance 

Whole life insurance is a permanent policy which will cover you for your entire life, provided you meet all the requirements for keeping the policy active.

How whole life insurance works 

Whole life insurance is usually more expensive than term, but in addition to the death benefit, it comes with unique benefits, most notably a cash value element. Aside from its lifelong death benefit, this cash value element is one of the primary features that can make whole life insurance worthwhile. Cash value accumulates over time as your premiums are paid, and usually comes with a guaranteed minimum growth rate.

The cash value can add monetary value during your life and be used for any reason, such as paying your premiums after you've accumulated a certain amount¹.

Whole life insurance doesn't expire 

The key difference between whole life insurance and term life insurance is that whole life insurance guarantees that a death benefit will be paid to someone at some point, assuming you continue to keep the policy in force. Ideally the benefit will be paid after the policy holder has lived a long and fulfilling life and had a chance to build a great legacy to pass on to their loved ones.

Getting on whole life early can be beneficial 

Given the cash value component of whole life insurance, getting on a policy earlier rather than later comes with the benefit of giving cash value more time to accumulate.

Another benefit of getting on a whole life insurance policy early in life is locking in low premium rates. Life insurance premiums tend to get more expensive as you get older.

If you develop a chronic illness or decide to pursue dangerous careers or hobbies, that could also increase your premiums.

The bottom line 

Term life insurance is a great way to ensure beneficiaries who depend on your income will be covered for a period of time. Whole life insurance helps you plan for the long run. You can build bigger death benefits that can cover your beneficiaries in the short-term if something happens, and also build a large legacy over the course of your life.

^1Disclosure Utilizing the cash value through policy loans, surrenders, or cash withdrawals will reduce the death benefit; and may necessitate greater outlay than anticipated and/or result in an unexpected taxable event. Assumes a non-Modified Endowment Contract (MEC).