Term vs Whole Life Insurance: How Each Works, What Each Costs, and the Questions to Ask

Term life insurance covers the insured for a stated period, such as 10, 20 or 30 years, and pays a death benefit only if death happens during that period. Many term policies can be renewed at a higher premium, and some can be converted to permanent coverage before a stated deadline. Whole life is permanent insurance built to last for life as long as the required premiums are paid. It usually carries a cash value and starts with a higher premium than term. The policy and its illustration decide what is guaranteed, how dividends work, and what happens after a loan, a missed premium, a surrender or a lapse. Which one fits depends on how long you need coverage, your budget, your health, your family and any business obligations.

The short answer, side by side

Term coverage is lower-cost protection for a specific period, and most term policies don't build cash value, according to the NAIC Life Insurance Buyer's Guide (opens in a new tab). Whole life is a form of cash value insurance, with premiums paid on a set schedule.

The difference also shows up in timing. Term premiums are lower at first but may increase at renewal, while whole life premiums are higher at first and usually don't increase under the policy's structure, according to the Texas Department of Insurance life insurance guide (opens in a new tab).

How long does term life insurance last?

A level-term policy keeps its stated death benefit, and usually its guaranteed premium, for the term you select. Common terms run 5, 10, 20 or 30 years, or to a specified age, according to the California Department of Insurance life insurance guide (opens in a new tab). If the insured dies during the term, the insurer pays the face amount to the beneficiary.

What happens when the term ends depends on the contract. A renewable policy may continue without new health evidence, but the premium generally goes up with each renewal, and the policy may stop allowing renewal at a stated age. A nonrenewable policy can't continue under its original contract, so new coverage means a new application. A convertible policy may be exchanged for eligible permanent coverage without new medical evidence during its conversion period. The deadline and the permanent policies you can convert into are set by each policy, so ask for both in writing.

If coverage ends without renewal or conversion, no death benefit is paid for a death after the coverage period, according to the NAIC life insurance consumer page (opens in a new tab).

How does whole life insurance work?

Whole life is designed to cover the insured's entire lifetime. In the early years, premiums are higher than the current cost of protection, and the excess builds a reserve, or cash value, that helps keep the premium level as the cost of protection rises with age, according to the California Department of Insurance (opens in a new tab).

Cash value moves with premiums, insurance costs, fees, interest or other credited amounts, withdrawals, loans and loan interest. Whole life policies may guarantee premiums, death benefits and cash values, and whole life cash value and death benefits appear as guaranteed in the Texas Department of Insurance (opens in a new tab) comparison table. The exact guarantees still come from your contract and illustration, so read those documents rather than a summary.

Dividends

A participating whole life policy may pay dividends based on the insurer's experience. Dividends aren't guaranteed, according to the NAIC (opens in a new tab). Depending on the options in the policy, they can reduce premiums, buy additional insurance or accumulate.

Policy loans and withdrawals

A policy may let the owner borrow against or withdraw cash value. The contract states how much is available, the interest rate, the repayment rules and the effect on benefits. Interest applies to a policy loan, and an unpaid loan plus accrued interest is subtracted from the death benefit, so a beneficiary may receive less than the face amount, according to the NAIC (opens in a new tab). An unpaid loan can also reduce surrender proceeds as well, and it raises the chance of a lapse if the policy value can't cover the charges.

Surrender charges

A surrender charge is deducted when you give up the policy during a period stated in the contract. Surrendering early can return less than the premiums you paid and can create a taxable event. Early cash value may be small or nothing at all, so ask for the surrender value in each policy year.

Why does whole life usually cost more than term life?

Term pays only if death happens during the term and generally carries no cash value. Whole life pays whenever death occurs, as long as the policy stays in force, and it builds cash value. Paying for lifelong protection plus a savings component costs more up front.

An illustrative example from the NAIC (opens in a new tab) shows the gap for a $100,000 death benefit at age 35:

This is an NAIC illustration, not a current quote or an average, and it doesn't state a health class, insurer, state or issue date. Use it only to see the size of the gap between the two structures, and get policy-specific figures from the insurer or agent.

What is guaranteed and what is only illustrated?

A life insurance illustration shows how a policy may perform over time, and it must separate guaranteed elements from non-guaranteed ones under the NAIC Life Insurance Illustrations Model Regulation (opens in a new tab). Where an illustration is required, it must accurately represent the policy, be signed as required, and be provided before or at policy delivery, according to the NAIC illustrations overview (opens in a new tab).

Read two columns. The guaranteed column shows the premiums, death benefits and values the insurer is bound to. The current or non-guaranteed column shows what may happen if today's dividend scale, interest rates or charges continue. Results can differ from the current scale, and dividends on participating policies aren't guaranteed. Variable life falls outside that model regulation's general scope and has its own securities disclosures instead.

What happens if a policy is renewed, converted, surrendered or allowed to lapse?

Each of these events changes your coverage, your costs or your taxes.

Renewal. A renewable term policy generally costs more at each renewal as the insured gets older, and the right to renew may stop at a stated age.

Conversion. Conversion swaps term coverage for eligible permanent coverage, often without new medical evidence, if you act within the conversion period. Ask for the exact deadline and the list of eligible permanent policies.

Missed premiums and lapse. A grace period gives time to pay before coverage ends. In New York, the grace period is 31 days or one month for scheduled premiums and 61 days for flexible premiums, according to the New York Department of Financial Services life insurance FAQ (opens in a new tab). After that, a whole life policy may apply a nonforfeiture option, reduce the benefit or lapse, depending on its terms and available values. A term policy without cash value can lapse after a missed premium.

Surrender and taxes. Death proceeds paid because of the insured's death generally aren't taxable income, though exceptions apply, such as certain transfers for value, and interest paid with the proceeds can be taxable, according to IRS Publication 525 (opens in a new tab). For a cash surrender, the amount above your cost in the contract generally counts as income. A policy loan isn't automatically taxable while the policy is active, but a lapse or surrender with an outstanding loan can produce taxable income. The IRS life insurance proceeds FAQ (opens in a new tab) covers the general rule. Ownership, beneficiaries, transfers and business arrangements can change the result, so a tax professional should review your specific situation.

How are universal and variable life different?

Universal life separates the premium, death benefit and cash value. Premiums and the death benefit may be flexible, but the policy needs enough funding or value to cover its charges, and credited interest assumptions affect how it performs, according to the NAIC buyer's guide (opens in a new tab).

Variable life puts cash value into investment options. Market performance affects the cash value and, depending on the contract, the death benefit. Losses can reduce value and may mean more premium is needed to keep the policy in force. Variable life combines insurance and securities investments, according to the SEC's questions to ask about variable products (opens in a new tab), and agents who sell it must also be licensed as registered financial professionals under FINRA rules, according to FINRA's page on insurance agents (opens in a new tab).

Drawbacks of each

Both structures have trade-offs, and neither list settles the choice for everyone.

Term coverage ends with the term unless it's renewed, converted or replaced. Renewal premiums generally rise with age. A new policy may require new underwriting if renewal or conversion rights don't apply. Most term policies build no cash value, and a missed premium can lead to a lapse.

Whole life starts with higher premiums. Early cash value may be little or none, and the policy can be less flexible than universal life. Surrender charges can cut what you receive if you leave early. Dividends aren't guaranteed, loans and withdrawals reduce benefits, and actual results can differ from the illustration's current scale.

What to compare before applying or replacing coverage

Group life through work

Group life insurance through an employer doesn't automatically follow you when you leave. Portability and conversion depend on the group policy and applicable law, so ask the plan administrator what happens to coverage when employment ends and what deadline applies.

The free-look period

A free-look period lets you review a delivered policy and return it for a refund within the period set by the policy and state law. California requires at least 10 and no more than 30 days for individual life policies, with 30 days for specified senior transactions. New York sets 10 to 30 days generally, 30 days for mail-order policies and 60 days in a replacement, according to the New York DFS (opens in a new tab). In Texas, the period is at least 10 to 20 days, according to the Texas Department of Insurance (opens in a new tab). The notice in your policy controls the deadline and procedure.

Replacing an existing policy

A new policy isn't automatically better than an old one. Replacement can bring surrender charges, a new contestability period, new expenses, lost guarantees and tax consequences, according to FINRA's guidance on exchanging a life insurance policy (opens in a new tab). Compare both policies in writing before you cancel the existing one.

Questions to ask the agent

• Is this term, whole life, universal life, variable life or a combination?
• How long does coverage last, and is the premium guaranteed for that whole time?
• If it's term, is it renewable, until what age, and what will renewal cost?
• Is it convertible, into which policies, and by what deadline?
• Which values are guaranteed, and which are current or non-guaranteed?
• Are dividends shown in the illustration, and are any guaranteed?
• How does cash value grow under guaranteed and current assumptions?
• What are the surrender charges in each policy year?
• What happens if I miss a premium, and which nonforfeiture options apply?
• What is the policy-loan interest rate, and how do loans affect the death benefit and lapse risk?
• If this replaces a policy I already have, what do I lose, and does a new contestability period start?
• What is the free-look period?
• Can I see the full policy, illustration and any prospectus and fee disclosures before signing?

If you're still working out the amount of coverage, our guide on how much life insurance you need walks through the methods consumer guides use.

How to check the agent and the insurer

Before you sign, confirm who you're dealing with. Your state insurance department's (opens in a new tab) producer lookup shows whether the agent holds life insurance authority, and its company lookup shows whether the insurer is authorized in your state. The NAIC Consumer Insurance Search (opens in a new tab) adds company complaint information, licenses and financial information. Ask the agent for the insurer's full legal name, the policy form and their license details. If the product is variable, also confirm the agent is registered to sell securities.

If a problem comes up with an insurer or agent, you can file a complaint with your state insurance department. The Connecticut Insurance Department complaint process (opens in a new tab), for example, takes written complaints online, by form, mail, fax or email, asks for your contact details, the insurer, the type of insurance, the policy number and a summary, and sends written findings after reviewing the insurer's response.

For help choosing who to talk to, see how to choose an insurance agent, independent vs captive insurance agents and insurance broker vs agent.

Frequently asked questions

Does term life insurance build cash value?

Most term policies don't build cash value, according to the NAIC (opens in a new tab). If the term ends without renewal or conversion, coverage stops and nothing is paid back.

Are whole life dividends guaranteed?

No. Dividends on a participating policy depend on the insurer's experience and aren't guaranteed, according to the NAIC (opens in a new tab). An illustration that includes dividends should show them in the non-guaranteed column.

Can I convert term life to whole life?

Often, if the policy is convertible and you act within its conversion period. Conversion may not require new medical evidence, but the deadline and eligible permanent policies vary by contract, so ask for both in writing.

Are life insurance death benefits taxable?

Death proceeds generally aren't taxable income to the beneficiary, according to IRS Publication 525 (opens in a new tab). Exceptions apply to certain transfers for value, and interest paid along with the proceeds can be taxable.

What happens if I stop paying whole life premiums?

After the grace period, the policy may apply a nonforfeiture option, reduce the benefit or lapse, depending on its terms and the value available. Read the grace-period and nonforfeiture provisions in your contract and ask the insurer which options you have.

Bringing it to an agency

Bring your current policies, any illustration you've been given and the questions above to a licensed agency. Riskado's directory lists insurance agencies across the US by state, city and category, so you can find one near you and check its license with your state insurance department (opens in a new tab) before the conversation.