• Retirement and Annuity Advisor Jennifer Lang

Term Life Insurance, Whole Life Insurance Life Insurance: What's the Difference?

When shopping around for a life insurance policy, you have many choices. From monthly low-cost term insurance, to more expensive but long-term coverage benefits of whole life and universal life insurance, there’s a wide landscape of options.

As you consider different selections, it’s important to understand how these types of insurance differ from another. Among permanent life insurance, two widely-purchased options are whole life insurance and indexed universal life insurance.

While term life insurance is the most straightforward, it covers you only for a short-term period. Conversely, whole life and indexed universal life policies give lifelong coverage, so long as a policy remains active.

But they are more complex, tend to cost more than term coverage, and can be better-suited for long-term objectives. With that said, the cash value component of permanent insurance may be attractive for a number of reasons, including for efficient legacy planning, tax-advantaged wealth building, and tax-deferred retirement saving.

If you’re exploring term life insurance versus whole life insurance and indexed universal life insurance, it’s prudent to be diligent. You will want to research and consider your options carefully, and to help you get started, here's a quick guide on the differences between these life insurance types.

What to Consider When Buying Life Insurance

When it comes to life insurance, people often focus on two things: length of coverage and price. Chances are you have heard of trendy sayings like “term over perm” or “buy term and invest the difference.” But the question of what life insurance someone needs isn’t an “either-or” situation. Nor is term insurance the “best” option by default.

Sure, term coverage may be purchased at the lowest initial cost. But when you need to renew your policy, term rates often increase substantially. You may also find that you actually need more than one type of life insurance policy.

So, any life insurance purchasing decision should include a vigorous fact-finding and analysis of your personal and household financial needs. In fact, some other variables to consider are:

  • Your risk tolerance

  • Your age

  • How your number of dependents might change

  • Your health status

  • Your time horizon before retirement

  • Whether your needs extend beyond just protection

Depending on your circumstances, you may want to consider permanent as well as term life insurance for your portfolio. Now, let’s go back to the overview of term and permanent life insurance options.

Term Life Insurance

Compared to whole life and indexed universal life, term insurance provides the simplest coverage. The policy owner holds the guarantee of a death benefit for a certain period. That can last anywhere from 10-30 years, with most term policies lasting for 20 years.

When a term policy expires, that’s it. Your loved ones won’t receive any payouts since the policy has ended. You may be able to renew your term policy, but your new rates will be based on your current age and the actuarial risks that come with it (for example, heightened health risks, shorter life expectancy, so on).

The benefits of term life insurance are:

  • Premiums stay fixed

  • Simplest form of life insurance coverage you can purchase

  • Available at lower cost than whole life and IUL, at least initially

  • Provides a straightforward, guaranteed death benefit for a preset duration

  • May come with ability to convert to a permanent policy

  • Some policies include riders for healthcare and long-term care costs

  • Flexible, short-term protection when people need it

Some downsides tied to term life insurance are:

  • Policy may lapse if premium payments are late or missed

  • No death benefit provided upon expiration

  • Renewal rates can be far more costly than your initial rates

  • No cash value included in the policy

For some people, no “return benefit” for potentially decades of premium payments can be hard to stomach.

Because its coverage is temporary, term life insurance can be a better option for those with temporary financial needs. People who find themselves in the following situations may want to consider this type of coverage:

  • Creating protection for households in high-need years, such as when they first have children

  • Providing immediate financial resources if a primary income earner dies unexpectedly

  • Covering the economic value of a homemaker should they pass away

  • Giving coverage for debts or expenses, like a mortgage, if an income earner deceases

In short, term insurance is a short-term, economical way to insure a large amount of money, or the income stream that a wage earner brings home. Those looking for lifelong coverage or needing efficient legacy planning vehicles may be better-served by permanent insurance options.