Term vs. Whole Life Insurance: What's the Difference

Life happens fast. When you’re considering the needs of the people who depend on you, it can be overwhelming to figure out what’s necessary and what's not. Here’s the deal: when you’re worried about more than just you, life insurance can be the security blanket that helps you rest easier. It's not an extra. It's a necessity.

There are a few types of life insurance. Term life insurance and whole life insurance are two of the most common. They're "cut from the same cloth," as the saying goes, but they’re really two different blankets. Both keep you warm, but in a different way and for different periods. Whether you should reach for one over the other depends on your family’s needs.

Should you buy term life or whole life insurance?

We'll walk you through the ins-and-outs of term vs. whole life insurance to help you choose the best option for you and your loved ones.

What is term life insurance?

Term life insurance is a policy that lasts for a set period or "term," like 6 months, 12 months, or longer. If you die within that time frame, your loved ones receive what’s called a “guaranteed term death benefit” equal to your insurance policy’s face value.

Term life insurance can help bring peace of mind to families and breadwinners who may be going through a transition. Starting a new season of life can make some people feel vulnerable, especially if their family relies on them to be the primary source of income.

Here's an example. If you have a newborn and your partner stays at home while you go to work, you might want to buy term life insurance until you're both back in the workplace. A term life policy could help replace your income should the unthinkable happen.

If you outlive your policy’s term, your loved ones don’t receive a payout. However, before your term life insurance policy expires, you have the opportunity to renew it.

What is whole life insurance?

Whole life insurance is more complicated than term life. It covers you for a lifetime. With a whole life insurance policy, your loved ones receive a “guaranteed death benefit” after you die, whether that's one year or 50 years after the policy is purchased. Whole life insurance is the most common type of permanent insurance policy, notes the Insurance Information Institute

Some policyholders who choose permanent life insurance are looking ahead to retirement. Others chose permanent life insurance for estate planning purposes. 

According to Life Happens, a whole life insurance policy can be a good fit for someone who likes predictability over time, since whole life offers death benefit guarantees, guaranteed rates of return, and fixed premiums.

Another unique benefit of a whole life insurance policy is the “cash value” savings plan. Part of your monthly or annual premiums is automatically put into an interest-earning savings account, which amounts to the tax-exempt “cash value” of your policy. In an emergency, you may be able to withdraw funds from this account or take out a loan against it. It depends on your insurance company.

When you die, your loved ones receive the “guaranteed life benefit” of your policy, while the insurance company keeps the “cash value” of the account. If you die before re-paying any “cash value” loans, your insurance company will deduct the amount owed (plus interest) from what your loved ones receive.

Because they offer coverage for a lifetime, whole life insurance policies tend to have higher premiums than term life insurance policies. Failing to make payments or surrendering a whole life insurance policy can come with heavy costs such as termination fees, interest charges, and tax consequences.

Term vs. whole life insurance comparison

 Here’s a brief recap to help you decide between term vs. whole life insurance:

 

Term Life Insurance

Whole Life Insurance

Coverage Period

A set amount of time

Your lifetime

Cost

Lower premium

Higher premium

Payout Amount

Guaranteed

Guaranteed

Cash Value

No; has no cash value and can't be borrowed against

Yes; has cash value that you may be able to draw from or borrow against

Start with a life insurance quote

The type of life insurance that’s right for you depends on your individual needs as well as your family’s.

Whole life insurance can be advantageous for some. However, if you’re like most Americans, and you’ve got a budget, a mortgage, or a growing family, term life insurance is one of the most affordable ways to protect those you love.

Is your family protected? According to Statista, 40% of Americans do not have any form of life insurance. Direct Auto Insurance can help. Call 1-877-GO-DIRECT (1-877-463-4732), click to get a life insurance quote online, or visit a Direct Auto location near you today. Friendly agents are available to help you compare term vs. whole life insurance!

The information provided herein is designed to give helpful advice on the topic discussed. It is not intended to provide legal or any other type of advice and is not meant to be a thorough discussion of every issue that a person should consider or may encounter. We are not responsible or liable for the availability of links to websites or resources, or for any content, advertising, products, services or other materials on or available through these websites or resources or your reliance thereon. Any references to third party rates or products are subject to change without notice. Trademarks are property of their respective owners. Individual term life insurance by Direct General Life Insurance Company, Nashville, TN. Policy 58TL02010713. Premium and other terms will vary by state, the insured's age, and the selected coverage.

Term vs. Whole Life Insurance