Stop – before you compare term vs whole life, you need to consider a more basic problem.

Before we get the the nuts and bolts, I want to realign your thinking. Comparing these two types of insurance from the perspective of ‘which one should I purchase?’ is misleading. They are two different solutions to two different problems. Term life insurance has premiums that are level for a time period (called the ‘term’), after which point the policy is not really feasible. It’s best suited for people who need life insurance for a timeframe – while the kids are at home, until you retire, etc. Whole life insurance typically has premiums for life. It is therefore more suitable for people looking to keep life insurance forever (well, at least until you pass). You should consider which problem you are solving before deciding what type of insurance you need.

One further note as well. You don’t have to pick one or the other – you can do a bit of both. Common practice is to have a large term policy with a smaller permanent policy. This gives you a large amount of coverage (sum of the two types) while you’re young and earning income. Then you cancel the term insurance in the future and your coverage reduces to just the whole life which sticks around for the rest of your life – i.e. your coverage stays high when you have family dependents and expenses, then drops down around retirement age. This is called layering, and is in fact what I have personally – a layer of permanent life insurance topped up with a much larger (and cheaper) term life policy.

AttributeTerm Life InsuranceCash Value Whole Life Insurance
Premium StructureLevel for a time (10,20, or 30 years), then increases, often 7X.Level for life, or pay higher premiums for a time and then 0 afterwards (quick pay).
Premiums GuaranteesPremiums generally fully guaranteed for the duration of the policy.Often not guaranteed, though some variations exist that are fully guaranteed.
Coverage structureLevel for duration of the policy.Generally level, though in some structures may be increasing over time.
Coverage guaranteesCoverage generally guaranteed level.Coverage (particularly increases) may not be guaranteed.
Cash valuesNope.Yes, cash values are available on policy cancellation.
Coverage LengthEffectively, for the duration of the initial 'term'.Generally for life.
  • Premium Structure. Term life insurance has premiums that increase every ‘term’. So a 10 year term has premiums that are level for 10 years. In year 11 premiums increase (generally by about 7X) and then are level for another 10 years, staircasing up like that until the policy expires. Whole life at it’s core has premiums level for life. Variations exists that can short pay the premiums (pay higher premiums for a shorter period of time, eventually creating a policy with no more premiums.
  • Premium Guarantees. Term life insurance premiums are generally fully guaranteed. Whole life insurance premiums may be, but are often not guaranteed.
  • Coverage Structure. Term life insurance has a death benefit that is level. Whole life insurance has a death benefit that is often level but variations exist that can have an increasing death benefit.
  • Coverage Guarantees. Term life insurance coverage is generally guaranteed not to change. Again whole life coverage is often not guaranteed but variations exist that are guaranteed.
  • Cash values. Term life insurance insurance is close to pure life insurance coverage, there are no cash values – if you cancel the policy there’s no money returned. Whole life has cash surrender values, which are effectively a partial refund of higher premiums. There’s a lot of sales strategies that center around whole life cash values, you should be careful and sceptical if that’s why you’re purchasing life insurance.
  • Coverage Length. This is the fundamental difference between the two types of life insurance. Life insurance has an expiry age, but is really only effective for the initial term. Whole life insurance is lifetime coverage and is expected to be kept for your entire life.