The purpose of this page is to explain the major differences between term and whole life. There are many strong opinions about both, and I hope to be as objective as possible in my explanation. I am a fan of both of these if used appropriately and would only discourage one on a case-by-case basis. So, let’s look at the differences:
1) Length of policy
The names are dead giveaways on this point. Term insurance is in place for a certain period of time, aka “term.” These are usually expressed as “20 year term” or “30 year term” and they mean exactly how they read. A 20 year term is a term policy that will be in force for 20 years as long as you are paying the premium. At the end of the term, you will either lose the policy completely, or have the option to continue paying it in future years, but at a MUCH higher premium.
Whole life is in place for your whole life. Hence, the name. This was the original type of life insurance offered in the early stages of life insurance. Term did not come about until much later. As long as premiums are being paid, this policy will be with you until you die. When that happens, your beneficiary receives the death benefit. So, your beneficiary is guaranteed to receive some money from this if you buy and keep the policy.
2) Premiums
Term policy premiums vary, depending on the type. Most contain level or fixed premiums during the specified term. For example, if your policy is a 20 year term and the premium is $100/mo, then it will remain $100/mo for the entire 20 year period. I’ll add that the premium may change during the term if there is some type of rider(kind of like a contract addendum) that falls off within the term, such as a disability rider that may expire when you reach the age of 65. There are other types of term policies that don’t have level premiums. These could be something called “Increasing” or “Decreasing” term policies, where the premiums go up or down annually. Other term policies may include a level premium for a set number of years and then give you the option to add to it after a specified period of time, which would increase the premium. This explanation doesn’t include ALL types of term policies, but these are by far the most common.
Whole life policies have a level premium for life. The only exception, as mentioned above, is if the policy has a rider that expires or alters the premium in some way. The most common example I’ve seen is called a “Waiver of Premium” rider that expires at age 65. So, if you take out the policy at age 25 and it costs $100/mo, then when you are at age 90 and the policy is still in force, you’re still paying $100/mo.
3) Cash value
Cash value is sometimes referred to as “equity” within the policy. In the movie It’s a Wonderful Life, when George Bailey tells Potter that he has $500 equity in his life insurance policy, this is what he was talking about. This means that as the policyowner is paying his premiums over time, a portion of those premiums goes to the cash value of the policy. You can think of it as a savings account within the policy. If George Bailey wanted to borrow $400 from his policy to use as cash, he could have. There are a lot of details surrounding cash value and how it’s used, so I’ll spare those details for another page. For now, just know that it exists.
Term Policies have no cash value. Whole Life does have cash value.
4) Dividends
Dividends are profits that are paid back to policyholders. If the company does well, they reward certain policyholders with some bonus money. These can be used to help pay premiums, increase your death benefit, or be paid in cash. From my experience, term policies do not allow dividend payouts. There may be some rare exceptions, but I would simply assume that they don’t. Whole life policies can collect dividends depending on the company and profitability. These are not guaranteed. They are also more likely if your insurance company is a mutual company(owned by policyowners) as opposed to a stock company(owned by stockholders). A mutual insurance company usually has the word “mutual” in the name, but not always.
Long form video
"It is no bad thing to celebrate an insured life."