Term vs. whole life insurance: how to choose

Most people shopping for life insurance end up choosing between two main types: term and whole life. Both pay your beneficiaries if you pass away while the policy is in force. The difference is how long the coverage lasts, what it costs and whether it builds cash value.

Term life: coverage for a set number of years

Term life covers you for a set period, often 10, 20 or 30 years. If you pass away during the term, your beneficiaries receive the death benefit. If you outlive the term, the coverage ends and there’s no payout.

Because it only covers a set period and doesn’t build cash value, term usually costs much less than whole life for the same amount of coverage. That’s why it’s popular with families paying off a mortgage, raising children or replacing an income for a certain number of years.

Whole life: coverage that lasts your lifetime

Whole life covers you for life, as long as premiums are paid. Premiums are designed to stay level, and the policy builds cash value over time.

You can usually borrow against the cash value. Keep in mind that policy loans charge interest, and any loan you haven’t paid back, plus interest, is subtracted from the death benefit your beneficiaries receive. Whole life costs more than term for the same coverage amount.

What about universal life?

Universal life is another type of permanent coverage. It usually offers more flexibility than whole life: you may be able to change your premium or death benefit within limits. Some versions focus on a lifetime death benefit with little cash value, while others build cash value tied to interest rates or a market index. Some universal life policies can lapse if premiums don’t keep up with the policy’s costs, so ask how the policy stays in force and what’s guaranteed.

How much coverage do you need?

There’s no single right number, but a simple way to start is to add up what your family would need to cover:

• Debts, including a mortgage, car loans and credit cards
• Years of income your family would need to replace
• Future costs, like children’s education
• Final expenses, such as a funeral and medical bills

Then subtract savings and any coverage you already have. The result gives you a rough idea of how much coverage to look for.

Can I switch from term to whole life later?

Many term policies include a conversion option. It lets you change some or all of your term coverage to a permanent policy without a new medical exam, as long as you do it before a deadline or age limit set in the policy. This can be valuable if your health changes. Ask whether a policy is convertible, and until when, before you buy.

Do I need my own policy if I have life insurance through work?

Group life insurance through an employer is helpful, but it’s often a limited amount, and it usually ends when you leave the job or retire. Some employer plans let you convert or keep the coverage when you leave, often at a higher cost. If your family depends on your income, a policy you own keeps going no matter where you work.

Buying life insurance in your 50s and 60s

You can still buy term or whole life later in life. Premiums are higher than for a younger person, and the cost depends on your age and health. Some policies need a medical exam, while others only ask health questions. If you mainly want to cover funeral costs and final bills, a smaller policy may fit. See Final expense insurance: what it is and who it’s for.

Which is right for you?

• Need a lot of coverage for a specific stretch of years? Term usually fits.
• Want coverage that never expires, or to leave money for final expenses no matter when? Whole life, or a smaller final expense policy, may fit.
• Want both? Some people combine them: a term policy for the years their family depends on their income, and a small whole life policy for final expenses.

Questions to ask before you buy

• How long will the coverage last, and what happens when it ends?
• Will my premium stay the same, or can it go up?
• Is the term policy convertible, and until what age?
• Does the policy build cash value, and what’s guaranteed?
• Are there riders, such as an accelerated death benefit if you become terminally ill?

Comparing a few policies side by side can make a real difference in what you pay for the same coverage.