What is the difference between a straight life policy and a 20 pay whole life policy?

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Life insurance shoppers often grapple with a big choice at the start of their decision-making process: Should I buy term life or whole life insurance?

The answer should be based on why you need life insurance. If you’re worried about finances that have a finite length, such as a mortgage or future college costs, you can typically solve that with term life insurance.

But if your need for life insurance stretches indefinitely, it’s time to look at the lifelong coverage provided by permanent life insurance policies. Whole life insurance is one form of permanent life insurance. Universal life insurance can also offer lifelong coverage and can be a much cheaper alternative to whole life.

Overview: Term vs. Whole Life Insurance

Let’s look at the positive and negative aspects between term life insurance and whole life insurance.

Term vs. whole life insurance

What is term life insurance?

Term life insurance locks in level premiums for a specific period, such as 10, 20 or 30 years. You can generally renew term life after the level term period, but your rates will no longer be locked in. Rates will go up every year you renew and could quickly become too expensive.

People buying term life insurance must decide on the length of the policy and the coverage amount.

Term life insurance policies come in multiple types:

• Level term: A level term life insurance policy has the same premiums and death benefits throughout the initial term length of the policy. After the level term period, rates will go up every year if you renew. Alternatively, you could get quotes for a new policy if you still need life insurance.
• Annual renewable term: A person with an annually renewable term life policy must renew it each year from the start, and will see higher rates as they age.
• Decreasing term: Premiums stay consistent with a decreasing term policy but the death benefit decreases during the policy’s term. One type of decreasing term life policy is mortgage life insurance. The death benefit drops as you pay off your mortgage, though the premiums stay the same.
• Return of premium term life: A return of premium term life insurance policy returns your premiums if you outlive the policy. This policy type is much more expensive than other types of term life.

Benefits of term life insurance

• More affordable than whole life insurance.
• Premiums stay the same during the level term period.
• Guaranteed death benefit amount.
• Can be a good choice if you need a policy specifically to cover your income-earning years.
• Can be a good fit if you primarily want to cover specific financial concerns that have a timeline, such as a mortgage.
• You can often convert term life to a permanent policy.

Drawbacks of term life

• If you still need life insurance after the level term period, renewal rates might be unaffordable.
• No cash value that you can tap into while you’re alive.

What is whole life insurance?

Whole life insurance is a form of permanent life insurance that remains in place as long as you make your payments.

A whole life insurance policy is cash value life insurance. There’s a cash value component that accrues over time. You can access your cash value through a withdrawal or loan, or you could surrender the policy and walk away with the cash value (minus any surrender charge).

Benefits of whole life insurance

• Fixed premiums mean no surprise costs down the road.
• Builds cash value at a regular rate.
• Guaranteed death benefit.
• Life insurance riders, including living benefits, offer extra coverage and features, such as accidental death and dismemberment coverage.

Drawbacks of whole life insurance

• More expensive than term life insurance.
• The death benefit will be reduced if you withdraw from the cash value or don’t repay loans you took against the cash value.

Term vs. Whole Life Insurance: Cost Comparison

Any price comparison of term vs. whole life will be only minimally helpful because of the policy differences.

But to come as close as possible, we compared rates for the longest term life insurance policy currently available, 40-year term life from Legal & General, to a whole life policy from American National:

• A 30-year-old healthy, non-smoking male would pay about 5.8 times more for a $500,000 whole life policy vs. a $500,000 40-year term life policy.
• A 30-year-old female would pay about 6.7 times more.

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Term vs. whole life insurance costs for a $500,000 policy

Comparing Term Life vs. Whole Life Insurance

Term life and whole life insurance comparison

Premiums

Both level term life and whole life have level premiums. That means your premium payments won’t change and you’ll know exactly how much you’ll owe. Life insurance companies generally offer payment plan choices, such as monthly, quarterly, semi-annually and annually.

If lifelong bills for whole life insurance aren’t appealing, some policies offer shorter payment schedules with larger payments, such as single-premium whole life insurance, or policies with payments for a certain number of years, such as 10 years. This allows you to have more budget flexibility later in life.

Payouts

Whole life and term life policies have payouts, called death benefits, that are guaranteed and don’t change. A death benefit is generally paid tax-free to your beneficiaries.

The main difference is that coverage ends with a term life policy if you don’t renew it every year after the level term period ends.

Cash value

Term life insurance builds no cash value. Whole life policies contain a cash value account that builds over time at a fixed earnings rate. This guaranteed cash value growth is one of the reasons whole life insurance is considerably more expensive than term life.

The policyholder can take money from the available cash value. You can take a loan against it and pay for anything you want. Or take out money as a withdrawal that you won’t pay back. The outstanding loan or withdrawal amount is deducted from the death benefit if you die without paying it back.

Any cash value remaining usually reverts to the insurance company when you pass away. Your beneficiaries receive the face value of the policy minus any amount that was taken out of cash value and not paid back.

If you’re looking for lifelong coverage without the high cost that a whole life insurance policy demands, consider guaranteed universal life insurance.

Ending a policy

While you do your best to anticipate financial needs many years down the road, you might find you no longer need life insurance. With term life insurance, you can stop paying and terminate the policy. Since there’s no cash value, there’s no money to walk away with.

If you wish to end a whole life insurance policy, you can simply stop paying, but that is not the best tactic. The life insurer will likely use any cash value to continue paying the premiums on your behalf until the cash value is depleted. Instead of walking away, contact the insurer and take the surrender value, which is the cash value minus any surrender charge.

How to Choose Between Term Life and Whole Life Insurance

When choosing between term life and whole life insurance, consider your reasons for buying a policy. If you want life insurance to replace your salary for the 15 years until your youngest child leaves for college, you don’t need the hefty expense of whole life insurance. Term life insurance is a much cheaper option if you only need coverage for a set number of years.

Term life insurance may be a good fit if:

• You have a specific debt, such as a mortgage, that you want covered if you pass away.
• You have children and want to make sure their college tuition is covered.
• You want life insurance to cover a certain period of time, such as the number of years you have until retirement.

Whole life insurance may be a good fit if:

• You want lifelong coverage.
• You want life insurance to fund a trust for your children.
• You have a dependent who needs lifelong financial support, such as a special needs child.
• You want life insurance that builds cash value you can access during your lifetime.
• You want to ensure death benefits provide money for funeral expenses regardless of when you die.

Summary: Choosing term life vs. whole life insurance

When choosing between term life insurance and whole life insurance, consider the following features and decide what’s most important to you.

Can I Change My Mind and Switch Life Insurance Policies?

Years after buying life insurance, you might find that the policy you picked is no longer best. It happens. Finances and life’s circumstances evolve. There are potentially ways to reverse course without buying a new policy.

Changing term life to whole life

Term life insurance policies often include a “term life conversion” option that allows you to convert the policy to a permanent life insurance policy. There’s a deadline for doing this, so check your policy for the conversion period. Your life insurance may have a few choices of permanent life insurance for the conversion. Or it may offer only one conversion option, and it might not be a whole life insurance policy.

Changing whole life to term life

If you’ve built up cash value within a whole life policy, you can ask your insurer if you can use the cash value to switch to a term life policy that’s paid up and end the whole life policy. Your life insurance company will be able to tell you the length of the new term life policy based on the money in your cash value account.

Life Insurance Alternatives

There are life insurance alternatives beyond whole life and term life. Universal life insurance is a type of permanent life insurance that can offer cash value, if that’s your priority. There are differences between whole life and universal life so here are the main varieties of universal life insurance.

Guaranteed universal life insurance

Guaranteed universal life (GUL) insurance offers the lowest risk universal life policy and is typically the cheapest universal life type. Guaranteed universal life insurance provides a level death benefit and your premiums don’t change. But these policies also have minimal cash value.

Guaranteed policies additionally don’t allow you to adjust premiums and death benefits, which may be an option in other types of universal life insurance policies.

Indexed universal life insurance

An indexed universal life insurance policy bases your cash value on gains and losses connected to an index, including S&P 500, or a fixed-interest investment. It offers more flexibility than GUL insurance by allowing policyholders to adjust premiums and death benefits, within limits.

Indexed universal life insurance generally has high policy fees and charges. These charges reduce the amount of money going toward your cash value.

Variable universal life insurance

A variable universal life insurance policy links your cash value’s success to sub-accounts that may contain stocks and bonds. You can adjust premiums and death benefits, which is similar to indexed universal life.

You’ll need to take an active role in deciding on the investments when you have a variable universal life insurance policy. Your decisions on your sub-accounts affect your cash value gains and/or losses

Variable life insurance

Variable life insurance sounds similar to variable universal life insurance, but there are key differences. Variable life insurance doesn’t allow you to adjust your premium payments, like variable universal life insurance.

Burial insurance

Also called final expense and funeral insurance, burial insurance is a permanent life policy with a relatively small death benefit meant to pay for final expenses.

These policies are typically guaranteed issue life insurance, which means you can’t be turned down and there’s no life insurance medical exam.

Burial insurance policies are more expensive than other types of coverage but can be the only option for older people who don’t have great health.

Supplemental life insurance

Employers may offer life insurance to employees at low or no costs. These group policies are usually connected to your employment, so you lose coverage if you leave your job.

These supplemental life insurance policies usually have smaller death benefits and generally shouldn’t be your sole life insurance coverage. But they can be a nice way to supplement your own individual life insurance.

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Term vs. Whole Life FAQ

Is term life better than whole life?

Term life insurance is a better choice if you’re looking for an affordable life insurance option to provide a financial safety net for a specific number of working years, such as the years of paying off a mortgage.

Whole life insurance is considerably more expensive, but if you can afford the higher premiums it may be worth it to you to have lifelong coverage, fixed premiums for the life of the policy and a cash value component.

How many years is the longest term life policy?

You can find 40-year term life insurance, which is the longest term length available, but it is rare.

Banner Life is one of the few life insurance companies that offer long level term lengths of 35 or 40 years. Protective is the other. Most insurers only offer terms up to 30 years.

Can you cash out a term life policy?

You can cancel a term life insurance policy whenever you like, but since there is no cash value component, you won’t get any money back.

Is whole life insurance a bad idea?

Whole life insurance is a terrible idea if your insurance needs can be filled by term life. If you buy whole life instead, you’ll be paying significantly more over many years for coverage that’s more than you need.

But some people need life insurance for the duration of their lives and want the guarantees offered by a whole life insurance policy. For them, the price may be worth it. Whole life insurance policies also usually pay dividends, which can offset their cost.

What happens to term life insurance at the end of the term?

Level premiums expire at the end of a term life insurance policy’s initial period, such as 20 years. After that, you can generally renew the policy but at a higher rate each year. If you still need coverage, you may be better off buying a new life insurance policy rather than paying the term life renewal rates.

Should I convert my term life policy to whole life?

Converting a term life policy to a permanent life insurance policy can be a great strategy for someone who has health conditions that would make buying a new policy (of any type) unaffordable.

Your life insurance agent can tell you the policy options you’ll have if you do a “term life conversion.” A whole life insurance policy might not be an option. Instead, you might be offered only universal life insurance. Your choices will depend on the insurance company.

Should I buy term or whole life insurance if I have a special needs child?

Preparing a financial plan that will take care of a special needs child after you’re gone requires the help of a good financial planner. You’ll likely name a guardian, prepare trust documents and consider how to fund the trust.

Types of permanent life insurance are generally used to fund trusts. Term life insurance is not appropriate in these cases. Having professional guidance is crucial in developing the right financial plan and identifying the right policy type. 

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