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Term vs. Whole Life Insurance: Which Is Best?

Have you ever planned a family getaway? You spend months researching and booking places to stay, places to eat, places to go—the whole nine yards. But you know what you can’t book? The seven-day forecast. Even after months of planning your vacation, there’s no way to guarantee it won’t rain.

But that’s the funny thing about life—no matter how much we plan, sometimes it rains. That’s why it’s so important to get things in place that we can control—like life insurance.

Okay, we know it’s not the most fun topic to talk about, but boy is it an important one! If someone relies on your paycheck, you need to have life insurance. And when you boil things down, you really only have two options when it comes to life insurance—term vs. whole life. One is a safe plan that helps protect your family, and the other one is, well, a total rip-off.

What Is Term Life Insurance? 

Term life insurance covers you for a specific amount of time. If you get a 20-year policy, you’re covered for that 20-year term. That’s why they call it “term” insurance. If you or your spouse dies at any point during those 20 years, your beneficiaries (the people you picked to inherit your money) receive a payout. For example, if you bought a $300,000 policy for a 20-year term and you die within the next 20 years, your beneficiaries would get $300,000. Yes, it’s really that simple.

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How much life insurance do you need? Find out with our free calculator!

Term life insurance plans are much more affordable than whole life insurance. This is because the term life policy has no cash value until you (or your spouse) dies. In simpler terms, the policy is not worth anything unless the policy owner dies during the course of the term. Term life is only there to replace an income.

Of course, the hope here is you’ll never have to use your term life insurance policy—but if something does happen, at least you know your family will be taken care of. They’ll still miss you, but they won’t miss you and wonder how they’re going to pay the bills.

What Is Whole Life Insurance? 

Whole life insurance (sometimes called cash value insurance) is a type of coverage that—you guessed it—lasts your whole life. Whole life plans are generally more expensive than term life. There are a couple of reasons for that, but mostly it’s because you’re not just paying for insurance here.

Whole life insurance costs more because it’s designed to build cash value, which means it tries to double up as an investment account. Getting insurance and a savings account with one monthly payment? It might sound like a smart way to kill two birds with one stone, but really, the only bird getting hit here is your financial future.

We’ll give it to you straight—insurance is a lousy investment strategy. A life insurance policy shouldn’t be a money-making scheme. It’s meant to provide security, protection and peace of mind for your family should the unthinkable happen. Period.

"Life insurance has one job: It replaces your income when you die." — Dave Ramsey, The Complete Guide to Money

Here’s another truth about whole life coverage. If you practice the principles we teach, you won’t need life insurance forever. Ultimately, you’ll be self-insured. Why? Because you’ll have zero debt, a full emergency fund and a hefty amount of money in your investments. Hallelujah!

The bottom line: There are far more productive and profitable ways to invest your money than using your life insurance plan. What sounds like more fun to you—investing in growth stock mutual funds so you can enjoy your retirement or "investing" money in a plan that’s all based on whether or not you kick the bucket? We think the answer is pretty easy.

Cost Comparison: Term vs. Whole Life 

Let’s say we have a friend named Greg who’s in his 30s and wants to secure $250,000 of life insurance for his family. He meets with a whole life insurance agent who pitches a $260-per-month policy that will include the insurance coverage, plus build up savings for retirement (which is what a cash value policy is supposed to do).  

On the other hand, a term life agent tells Greg he can get a 20-year term with $250,000 of coverage for about $13 per month—that’s a $247 difference compared to whole life.

If Greg goes with the whole life, cash value option, he’ll pay a hefty monthly premium. But it’s because the part of his premium that isn’t insuring him is going toward his cash value “investment,” right? Well, you’d think, but then come the fees and expenses . . .

In truth, the additional $247 per month disappears into commissions and expenses for the first three years. After that, the cash value portion will offer a horrifically low rate of return for your investments (we’re talking 1–6% here!).1

But here’s the worst part. Let’s say Greg gets this $250,000 whole life policy at 30 years old. He pays $260 per month, with $15 going to the insurance and the rest into that savings account with a 6% return rate. After 40 years of paying way too much for his insurance, Greg is 70 and has $250,000 in insurance and roughly $488,000 in cash value. Then, Greg dies. How much does the insurance company pay out to his wife and kids? $250,000. But wait, what happened to the $488,000 of Greg’s hard-earned savings? The insurance company keeps it. Sound like a scam? That’s because it is!

You see, only Greg was entitled to the money in that savings account, so he would have needed to withdraw and spend it while he was still alive. Talk about pressure! Unfortunately, Greg died before he had the chance. Now Greg is rolling in his grave as his insurance agent is staying in a five-star resort on Greg’s dime.

But what if Greg instead chose the $13, 20-year term life policy and decided to invest the $247 per month he’ll save by not choosing the whole life plan? If he invests in a good growth stock mutual fund with an 11% rate of return, he would have about $214,000 in investments by the time his 20-year term life policy expires and more than $2.1 million at age 70. That’s a lot of bang for your buck! Not only that but if Greg dies at this point, his wife and kids will get about $2.3 million! We think Greg will rest much easier knowing his family will be staying at that five-star resort.

The moral of the story is this: Keep your insurance and your investments separate. You don’t want to spend years investing your hard-earned money only to leave it all to your insurance company. Be smart. Get term life insurance.

How Much Term Life Insurance Do I Need?

You should get a term life insurance policy equal to 10 to 12 times your annual income. So if you’re making $50,000 a year, you need at least $500,000 in coverage. That way, your salary will be replaced for your family if something happens to you. You can run the numbers with our term life calculator.

And don’t forget to get term life insurance for both spouses, even if one of you stays at home with the kids. Think about what you would pay in childcare and home upkeep costs if the stay-at-home parent was gone! You both need term life insurance.

Want to make sure your family is covered no matter what happens? Check on your coverage before it becomes an emergency. Take our 5-Minute Coverage Checkup to make sure you have what you need.

How Long Do I Need Term Life Insurance?

Dave recommends you buy a policy with a term that will see you through until your kids are heading off to college and living on their own. That might be anywhere from 20­­ to 30  years depending on whether you already have kids or are planning to have them.

A lot of life can happen in 20 years.

Let’s say you get term life insurance when you’re 30 years old. You and your spouse have an adorable little 2-year-old toddler running around. You’re laser focused on paying off all your debt (including the house) and look forward to investing and retirement planning in the future.

Fast-forward 20 years—you’re both in your 50s and that little pint-sized toddler is now a 22-year-old college grad. The years went by fast, didn’t they?

But look where you are! You’re debt-free (the house and everything), and with your 401(k), savings and mutual funds, you’re sitting at a cool net worth of $500,000 to $1.5 million! The years were good to you, and it’s all because you had a plan.

Since you were able to build up your net worth, you have peace of mind. At this point, if something were to happen to you or your spouse (even without life insurance), the surviving spouse would be able to live off of your savings and investments. Congratulations, you’ve become self-insured! When you become more financially secure, you have less of a need for life insurance.

Don’t Wait Until You Need Life Insurance to Get It

Look, this stuff isn’t easy to think about. But the truth is, life is precious! We can’t see the future and aren’t promised tomorrow. The cost of not having a plan in place for the unthinkable is much higher than the cost of term life insurance. You need to keep your loved ones protected.

The ideal time to buy life insurance is when you’re young and have a clean bill of health, especially because life insurance companies are all about weighing the risks of the person purchasing the policy. If you’re in the market for new life insurance or want an expert to talk to, we recommend Zander Insurance. Don’t let another day go by without being protected. Start here to get your term life insurance quotes.

Ramsey Solutions

About the author

Ramsey Solutions

Ramsey Solutions has been committed to helping people regain control of their money, build wealth, grow their leadership skills, and enhance their lives through personal development since 1992. Millions of people have used our financial advice through 22 books (including 12 national bestsellers) published by Ramsey Press, as well as two syndicated radio shows and 10 podcasts, which have over 17 million weekly listeners.

How much life insurance do you need?

Get Your Numbers

How much life insurance do you need?

Find the best term life policy for you with our free life insurance calculator.
Get Your Numbers

How much life insurance do you need?

Find the best term life policy for you with our free life insurance calculator.
Get Your Numbers