Whole Life vs Term Life

Comparisons between term life insurance and whole life insurance began as soon as whole life was invented. Term insurance was the original form of life insurance. The insurance contract, or policy, has a specified, limited duration. The premium rate paid by the policyholder closely tracks the cost of insurance. This cost is computed by actuaries based on average life expectancy.

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Whole life was spawned by the belief that premium dollars spent on term insurance were wasted unless the death benefit was actually paid out. In a whole-life policy, part of the premium pays the cost of insurance while another part is invested by the insurance company and allocated to the policy’s cash value. This cash value can be redeemed by the policyholder. Otherwise, the policy is held for the "whole life" of the insured. (Actually, the policy matures at the insured’s age of 95 or 100 and the cash value – which by then has risen into equality with the death benefit – is paid out.)

Whole-life premiums are higher than term-life premiums – usually much higher. This premium differential is often the starting point of the great debate: whole life vs. term life. Framing the discussion in this way suggests a contest between insurance heavyweights, with the victor getting the prize in the form of patronage by all or most life insurance buyers. This is misleading. First, the key basis for comparison is temporal rather than pecuniary. Second, the debate need not be winner-take-all. Both whole life and term life can win – or rather, insurance consumers can win by selecting either one, depending on circumstance.

Insurance Need – Temporary or Permanent?

Young married couples typically face a large total need for insurance, consisting of several component needs. A 30-year home mortgage is a sizable debt to be paid off by one spouse after the other has died. Funding one or more future college educations is another onerous burden for the survivor to face. In order to meet daily expenses, both children and the surviving spouse will need income to replace the deceased’s former earnings. The sum of these insurance needs is certain to be large.

The common thread uniting these component insurance needs is that they are temporary. Mortgages are eventually paid off. Kids grow up, graduate and go out on their own. Couples eventually retire; they may even accumulate sufficient wealth to “self-insure” their lives prior to retirement. At any point in time, this scenario of a large, long-lived but temporary need for life insurance is played out by millions of households.

Term life insurance is the best bet to write a happy ending to the story. It is designed to end when the insurance need ends, allowing households to invest money and accumulate wealth using dollars that would otherwise be spend on whole-life insurance. While whole-life policies also create investment value in their cash-value account, households can probably invest the money themselves and hatch a larger nest egg than would develop inside a cash-value insurance policy. This analysis has given rise to a famous maxim: “Buy term and invest the difference.” The fact that term life is the least expensive variety of life insurance also has another benefit – households can afford to fund the full amount of their insurance need. This is vitally important since insurance need is often greatest just when household income is at its lowest. Finally, the ability to convert a term-life policy to whole life without requalification at expiration of term – an option offered by many term-life policies – gives households the best of both worlds by letting them switch horses in response to changing insurance needs.

That is not the end of the story, however. A need for permanent insurance can arise for many reasons. Late in life, couples or individuals may wish to shield a spouse or loved ones from the financial burden imposed by such final expenses as funeral costs. A surviving spouse may wish to protect a legacy against the ravages of estate taxes. A business owner may want to use business-succession life insurance to perpetuate the business while providing liquidity for a surviving spouse. Tax planning may dictate the recourse to cash-value insurance as collateral for loans that provide tax-free income to the household. These specialized insurance needs also share a common attribute – they require permanent insurance, either to create cash value or because the date of death is uncertain.

Whole-life insurance is the classic way to meet permanent insurance need. Its death benefit can be used to pay final expenses, pay estate taxes or fund a business buyout. Its cash value can provide loan collateral and then later pay off the loan.

Price Isn't Everything

Traditionally, most of the "whole life vs. term life" debate has focused on the difference in premium between equivalent whole-life and term-life policies. That difference is real but the focus puts the cart before the horse. It makes sense for a young married couple to buy term-life insurance not merely because it is cheaper but because it fits their insurance need perfectly. Their years of paying term-life premiums are not wasted even if the death benefit is never paid. They are buying a valuable product called "protection".

By the same token, term-life insurance won't fulfill a permanent insurance need if the insured outlives the duration of the policy. This time, term-life premium dollars really are wasted. Price is a key variable in selecting life insurance but the duration of insurance need must be determined before a price comparison becomes meaningful.

You Can't Make a Racehorse Out of a Mule – But Who Wants To?

Racehorses do not compete against mules because that would vitiate the very purpose of a contest. When relative speed is in doubt, the race is supposed to settle the question. There is no doubt that racehorses are faster because they were bred to perform different functions than those performed by mules. As long as racehorses and mules each do the jobs they were bred to do, they are both valuable.

The same is true of the "whole life vs. term life" debate. Treating this debate as a contest implies that the winner is always right and the other wrong. In reality, each can and should win when performing its proper function.


"Whole life vs. term life" is a potentially misleading dichotomy. Temporary insurance needs are better met by term life, while permanent insurance needs demand a form of permanent insurance, such as whole life. The fact that term life is cheaper than whole life is important but not always decisive. When the insurance need is permanent, it is possible to waste premiums spent on term insurance even if term life is the cheaper option. First, determine the duration of the insurance need. Then, select the best policy from the type of insurance that fits the need.

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