Term vs Whole Life Insurance: Which Is Better?
This calculator compares the total cost of a term life insurance policy versus a whole life insurance policy over the same period. It also shows the "buy term and invest the difference" strategy, where you purchase cheaper term insurance and invest the premium savings in the stock market.
Key Differences
- Term life: Pure insurance protection for a set period (10, 20, or 30 years). If you die during the term, your beneficiaries receive the death benefit. If you outlive the term, coverage ends with no payout. Premiums are significantly lower.
- Whole life: Permanent coverage that lasts your entire life. Builds cash value over time that you can borrow against. Premiums are 5-15x higher than term life for the same coverage amount.
- Buy term & invest the difference: A popular strategy where you buy affordable term life and invest the money you save on premiums. Over time, investment growth often exceeds whole life cash value.
When Whole Life Makes Sense
Whole life insurance may be appropriate for estate planning, leaving a guaranteed inheritance, funding a trust, or if you've already maxed out all other tax-advantaged investment accounts. For most people, term life with disciplined investing is the better financial choice.
Frequently Asked Questions
Is term or whole life insurance better?
For most people, term life insurance is the better choice. It's significantly cheaper and provides the same death benefit. The "buy term and invest the difference" strategy typically outperforms whole life's cash value growth over time.
How much more does whole life cost than term?
Whole life insurance typically costs 5-15 times more than term life for the same coverage amount. A $500,000 policy that costs $50/month as term might cost $400-$750/month as whole life.
What happens to term life insurance when it expires?
When your term expires, coverage ends. You receive no payout. You can often renew at much higher rates or convert to a permanent policy. That's why the "invest the difference" strategy is important.
Does whole life insurance really build cash value?
Yes, but slowly. In the first 5-10 years, most of your premium goes to insurance costs and fees. Cash value typically equals about 30-50% of total premiums paid after 20 years. Investment accounts generally grow faster.
What is the buy term and invest the difference strategy?
Instead of buying expensive whole life, you buy affordable term life and invest the premium difference in index funds or retirement accounts. Over 20-30 years, the investment portfolio typically far exceeds whole life's cash value.