Term vs. whole life insurance — here's how to decide which is right for you (2024)

Two common types of life insurance, term life insurance and whole life insurance, can be useful coverage for many people.

However, term and whole life insurance function very differently. Term life insurance covers a person for a set number of years and expires after that term, while whole life insurance covers a person for their entire life and builds cash value that can be used while living. These two types of life insurance are designed for different wants and needs, and the right one for you largely depends on your financial goals.

Here's what you need to know about the two types of life insurance and how to decide which is right for you.

• What is the difference between term and whole life insurance?
• What are the pros and cons of term life insurance?
• What are the pros and cons of whole life insurance?
• Who is term life insurance for?
• Who is whole life insurance for?
• Bottom line

While they're both types of life insurance, term life and whole life insurance differ on several key points.

Term life insurance is a policy that covers a policyholder for a set period, generally 10 to 30 years. The death benefit is only paid out if the person dies during that term — if you outlive the term, the policy expires. It's useful for those who have temporary needs — like parents with young childrenor people paying off a mortgage with a partner.

If you're looking for the best term or whole life insurance, CNBC Select has done some of the research to make your decision easier. We rated Northwestern Mutual as our top pick overall for life insurance products for its high customer satisfaction and financial strength ratings. We also picked Guardian for term life insurance because of the company's convertibility features on term policies and high financial strength ratings.

Whole life insurance is a permanent policy that covers a person for their entire life. This type of policy can do more than just pay out a death benefit. "It's got more flexibility and more features than a term life insurance product does," says Jason Handal, head of risk products at Northwestern Mutual."It gives you a guaranteed death benefit and it gives you guaranteed cumulated values. It can earn dividends."

MassMutual is a top choice for those looking for whole life insurance due to its range of policies available. MassMutual also consistently pays out dividends to policyholders and has high ratings for financial security from AM Best.

Here are the main differences you should be aware of when considering these types of life insurance:

• Cost. Term life insurance is more affordable than whole life insurance. Whole life insurance costs around six times as much as term insurance with the same death benefit, according to Prudential.
• Cash value. Whole life builds cash value — which can be borrowed against or withdrawn later on in life — at a guaranteed rate every year. Term life doesn't build cash value.
• Policy length. Term life insurance generally lasts for a period of 10 to 30 years from purchase. Whole life insurance can last your entire life provided that premiums are paid on time.
• Dividends. Some whole life policyholders are able to earn dividends or portions of the insurance company's profits with participating policies issued through a mutual company. This isn't offered for term life insurance policies.
• Death benefit. With term life insurance, there's no guarantee that anyone will receive money since the policy only pays out if you die during the set period. With whole life insurance, you're sure to leave a financial legacy as long as your policy is in force.

Benefitsof term life insurance

• Lower premiums. Term life insurance can be significantly cheaper than whole life insurance, as well as other types of permanent life insurance. That could leave more money in your budget to invest for retirement on your own.

Drawbacksof term life insurance

• No guaranteed death benefit. If you outlive the term of your term life insurance, the policy expires and has no value. If you're looking for a way to leave money behind, a term life insurance policy most likely isn't a good fit.
• No cash value. Term life insurance doesn't build cash value.

Benefitsof whole life insurance

• Can build cash value for later in life. It grows at a guaranteed rate, and you can use this money while you're alive to pay premiums, back a loan, or increase the policy's death benefit.
• Can be useful for estate planning. If you want to pass along money to heirs with tax benefits, a whole life insurance policy can oftentimes be helpful.

Drawbacksof whole life insurance

• Higher monthly cost. Whole life insurance premiums will likely cost several times what a term life insurance policy would cost.

Term life insurance makes sense for those who need to cover a temporary need. Oftentimes, term life insurance works well for those who have obligations that will eventually no longer be there, like having young children or having a mortgage. Term life insurance can provide coverage during those years when your income is necessary for those who depend on you. Since it's generally more affordable than most permanent life insurance, term policies can be a good fit for those who have a limited budget but need coverage.

Additionally, term life insurance can have some flexibility. Some policies can convert from aterm policy into a permanent policy within a number of years as your needs, income and responsibilities change. This feature, called convertibility, is generally offered as a provision on a term life insurance policy called a rider.

Whole life insurance policy could be a better fit for those who need more flexibility than a term life insurance policy. That's especially true for those thinking about their income needs in retirement and their estate planning situation.

While whole life insurance is first and foremost a life insurance policy, the cash value that whole life insurance and other types of permanent life insurance can build could be useful later on in life. "Having that having that cash value oftentimes is a really foundational part of a client's overall asset allocation," Handal says.

While whole life insurance may be more expensive in upfront premiums, these policies can be more flexible for those who are looking ahead in their financial lives.

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At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed decisions with their money. Every life insurance review is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of life insurance products. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics. See our methodology for more information on how we choose the best term and whole life insurance.

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