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Term vs. Whole Life Insurance: What’s the Difference?

Got dependents? Ya need life insurance. Let’s talk term vs. whole life.

Life insurance is not a fun topic, but it matters! Your two main options are term coverage and whole life. But which is better? The first is a safe plan to protect your family—the second is a rip-off. We’re going to walk you through the differences in term vs. whole life now.

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. Makes sense, right?

If you die at any point during those 20 years, your beneficiaries (the people you picked to inherit your money) receive a life insurance 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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And here’s the key difference between whole life vs. term life: Term life plans are much more affordable than whole life insurance. This is because the term life policy has no cash value until you die. In simpler terms, the policy is not worth anything unless the policy owner dies during the course of the term. Term life has one job: to replace an income.

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Of course, no one wants to use their 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.

What Is the Difference Between Whole Life and Term Life Insurance?

We’ll give it to you straight—life insurance works, while whole life tries to do too many things at once. Mixing insurance with investment makes no sense, but that’s exactly what whole life tries to do. It’s like training your house cat to be a watchdog: She might learn how to scratch a few intruders, but she’ll never really guard your property, and she’ll be a miserable pet.

In the same way, a life insurance policy shouldn’t be a money-making scheme. It’s to provide security, protection and peace of mind for your family should the unthinkable happen. Period. Term life is the bulldog of life insurance—you hope you’ll never need him to do his thing, but you’re sure as heck happy to have him around the house.

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

Here’s another truth about whole life coverage. If you practice the seven baby steps, 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 Insurance

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 insurance 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 his investments (we’re talking 1–3% here!).

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 2% return rate. After 40 years of paying way too much for his insurance, Greg is 70 and has $250,000 in insurance and roughly $180,000 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 $180,000 of Greg’s hard-earned savings? The insurance company keeps it. Sound like a scam? That’s because it is!

whole vs term life insurance

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! We think Greg will rest much easier knowing his family will be staying at that five-star resort.

Term vs. Whole Life Insurance Pros and Cons

Term life . . .

  • Is way more affordable.
  • Gives you the option to invest however you prefer (instead of locking your cash into a very low-return investment).
  • Allows you to move toward becoming self-insured.

But whole life . . .

  • Is far more expensive.
  • Tries to do two financial jobs (insurance and investing) at once but ends up doing neither thing well.
  • Delays or stops you from ever becoming self-insured.
  • Can lead to having a huge amount of your cash value in the policy disappear if you die without cashing it out.

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.

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

Look, this stuff isn’t easy to think about. But 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 look at the risks of the person purchasing the policy when underwriting it. If you’re in the market for new life insurance or want an expert to talk to, we recommend RamseyTrusted provider Zander Insurance. Don’t let another day go by without being protected. Start here to get your term life insurance quotes.

Term vs. Whole Life Insurance FAQs

How Much Life Insurance Do I Need?

That’s easy. You need policy coverage equal to 10 to 12 times your annual income. Say you’re making $50,000 a year. You need at least $500,000 in coverage. That replaces your salary for your family if something happens to you. You can run the numbers with our term life calculator. Quick note: Don’t forget to get term life insurance for both spouses, even if one of you stays at home with the kids. Why? ‘Cause if the stay-at-home parent was gone, replacing that childcare and home upkeep would be expensive! If you want to make sure your family is covered, take our 5-Minute Coverage Checkup.

How Long Do I Need Term Life Insurance?

Dave recommends a policy with a term that will see you through until your kids are heading off to college and living on their own. That’s anywhere from 20 to 30 years depending on your kids’ ages. Why so long? Well, a lot of life can happen in 20 years.

Let’s say you get term life insurance in your early 30s, when you and your spouse have an adorable 2-year-old toddler. You’re laser focused on paying off all your debt (including the house), but you have an eye on retirement planning in the future. Fast-forward 20 years—you’re both in your 50s and that little pint-sized toddler is now a college grad. The years went by fast.

But look where you are! You’re debt-free—and with your 401(k), savings and mutual funds, you’re sitting at a cool net worth of $500,000 to $1.5 million! By working the plan, you were able to build up your net worth and your peace of mind. Now if the unthinkable should happen, even without life insurance, the surviving spouse could live off your savings and investments. Congratulations, you’ve become self-insured! Your need for life insurance has shrunk or vanished by now.

What Happens to Term Life Insurance at the End of the Term?

It’s nothing sensational. The policy will just expire, but you won’t notice. You’ll already be in the money.

What Information Do I Need When Getting a Life Insurance Policy?

Applying for life insurance will mean providing some personal info, so let’s look at a few of the things you’ll need to answer as you look for coverage.

  • Do you already have any existing life insurance?
  • How’s your overall health?
  • Any medical history of serious illness?
  • What’s your household income?
  • How much are your monthly expenses?
  • How much debt do you have, including a mortgage?
  • What plans have you made toward retirement?
  • What are your plans to cover college for your children?
  • Have you thought about how you want to pay for funeral expenses?
  • What’s your strategy around estate planning and tax?
  • Do you have a will, and does it include plans for a trust?
  • What’s your age?
  • The ages of your children?

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. Learn More.

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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