Life insurance can help safeguard the financial futures of your loved ones, but how do you choose which type of policy to get? Understanding the difference between term and whole life insurance may help you decide which makes sense for you.
What is term life insurance?
Term life insurance is an insurance policy that pays beneficiaries if you die while the policy is active. The "term" is a set period for paying premiums (the amount you pay for coverage). Most commonly, that term is between 10 and 30 years. As long as your payments are up to date, your beneficiaries would receive an income-tax-free1 lump sum cash payout upon your passing. If you don't pay the premiums or renew when the term ends, your beneficiaries would not receive a payout.
What is whole life insurance?
Whole life insurance is a type of permanent life insurance that covers you for your lifetime. When you die, your beneficiaries typically receive a tax-free death benefit. It also offers a cash value that could grow over time and that you can access during your lifetime, though outstanding loans and withdrawals decrease the death benefit. If the policy offers dividends, these can increase both the cash value and death benefit.
Key similarities of term and whole life insurance
Death benefit
Both offer an income-tax-free payout1 to your beneficiaries if you die, though in the case of term life, your beneficiaries receive nothing if you outlive the term.
Fixed premiums
Both offer fixed premiums. With term life insurance though, if you renew after the term ends, the premium generally would be higher because you are older, and with increased age might come health issues that have developed since you bought the original policy. Whole life premiums can be offset or partially funded by the dividend (if applicable), which isn't an option with term life. Also, if a client can no longer afford premiums, they can take a lesser death benefit rather than cancel coverage or allow coverage to lapse.
Underwriting
Underwriting is the process of insurance companies reviewing your health and lifestyle to ensure the right coverage can be provided at the most appropriate price. This process may require undergoing a medical exam or sharing other information such as medical history, including prescription history, motor vehicle record, and criminal record. While some types of life insurance, like coverage through an employer, may not require traditional underwriting, individual term and whole life coverage usually does.
Related: Life insurance: Know the basics and how it can help manage risk
Riders
Riders are add-on features that could increase your premiums. Examples include:
- Convertibility rider for term life that allows you to convert to a whole life policy
- Return of premium rider for term life that returns premiums if you outlive the term
- Accidental death rider that pays out more if you die in an accident
- Waiver of premium rider that waives future premiums in case of disability or loss of income due to illness or injury, though the bar is high for qualifying
- Long-term care rider that covers nursing home or home care
Grace periods
Both term and whole life policies may offer grace periods (usually 30 days), allowing you to pay the premium after the due date without coverage lapsing. If you were to die during that grace period, your beneficiaries would receive a payout. Grace periods are designed as a safety net for the policyholder, not as a substitute for timely premium payments.
Key differences between term and whole life insurance
Length of coverage
Perhaps the biggest difference between term and whole life insurance is how long coverage lasts. Term is shorter, most commonly 10 to 30 years. Whole is effective for your lifetime.
Cost
Term life is less expensive than whole life, though you could consider your return on investment with whole life given its cash value component, rather than just focusing on premiums.
Cash value
Term does not build cash value, whereas some of the premiums you pay for a whole life policy goes toward a cash value portion. The accumulated cash value can be used to pay for premiums, borrowed as a loan with interest, taken as a withdrawal, or cashed out. Under certain circumstances, these may be subject to income tax. Note that if you die, the insurance company will pay the death benefit, but some keep the accumulated cash value.
Dividends
Some whole life policies may pay dividends. Although not guaranteed, dividends are historically paid annually. Dividends offer flexibility, as they can be paid out in cash or used to buy additional units of coverage, offset premium payments, or build cash value. Dividends can compound to build more cash value and death benefit over time. Term life insurance policies typically don’t pay dividends.
Surrender charges
If you cancel a whole life policy early, you may have to pay surrender charges, which is a fee subtracted from the cash value. (Because term life policies don’t have a cash value; they don't incur surrender charges.) When you cancel a whole life policy, you get the surrender value, which is federally taxable. Typically, surrender charges are higher the earlier you cancel and lower the later you cancel. Eventually, a policy will no longer have any surrender charges. There are no fees if you cancel term life insurance or fail to make payments after the grace period.
Here are these differences at a quick glance:
| Term | Whole | |
| Length of coverage | Preset | Until you die |
| Cost | Lower | Higher |
| Cash value | No | Yes |
| Possibility of dividends | No | Yes |
| Surrender charges | No | Yes |
Who should get term life insurance?
Term life insurance may make sense for those who want to cover a specific cost, such as a mortgage or a college education. Taking out a policy for an appropriate length of time may help to accomplish this. For example, a parent with a 2-year-old child may take out a 20-year term (16 years until the child turns 18 and attends college + 4 years for college) so that a potential death benefit could be used for educational expenses.
Who should get whole life insurance?
Whole life insurance may make sense for people with dependents who will likely require lifelong care, like children with special needs; when money is needed regardless of when death occurs, such as to cover estate taxes; and when you wish to leave a tax-free legacy. Whole life also offers living benefits through cash value that can be used for a variety of purposes, such as to supplement retirement income. If your policy needs changing, a 1035 exchange generally allows the cash value in the policy to be transferred to a different type of policy, such as a hybrid life insurance policy with long-term care rider, potentially tax-free.
How much life insurance do you need?
One guideline for the amount of term life insurance you need is 10× to 12× your salary, plus any bonuses. If you're buying term life insurance to cover a specific expense, consider those costs in your calculation. For whole life insurance, the primary driver should be the individual's estate-planning objectives—such as funding estate taxes, providing liquidity for heirs, or ensuring a guaranteed legacy—within the context of long-term premium affordability.
How to buy term life insurance
If you're ready to get term life insurance, here are the steps you'd take:
1. Decide how long you want the term to be.
Think about the specific cost or costs you'd want to cover if you were to pass away. Let that guide you to the right term length. There are online calculators that could help too.
2. Research and compare policies and prices.
Many providers allow you to get quotes online. Investigate what's required of you during the application process, such as undergoing a health exam. Check out reviews from customers, so you know your loved ones are likely to have a smooth customer service experience if they need to file a claim.
3. Consider riders.
Yes, they'll make your premiums go up, but these can personalize your policy. Note that Fidelity Investments Life Insurance Company (FILI) does not offer riders.
4. Complete an application.
Once you've chosen your provider, follow their process for applying for coverage. You will need to answer many personal questions about yourself, especially about your health.
5. Follow through on any requests.
After the application, the insurance company may reach out to you with additional steps they'd like you to take, such as submitting to a medical exam.
How to buy term life insurance through Fidelity
To purchase term life insurance through Fidelity:
1. Start with the Term Life Insurance Coverage Calculator.2
It can help you determine how big of a policy you may need.
2. Get an estimate using the Term Life Insurance Quote Tool.3
Find out how much insurance may cost after sharing some information, like your height, weight, gender, age, state of residence, whether you smoke, and how long of a term and how much coverage you want.
3. Complete your application online.
This typically takes about 15 to 20 minutes. Have your medical history handy.
4. Look out for additional requests.
If more information is needed, you will be emailed. For instance, you may be asked to undergo a medical exam.
5. Wait for a policy offer.
If your application is approved, we'll let you know your premium cost in 1 of 2 ways: usually by email within 4-6 weeks or sometimes onscreen right after you submit your application.
6. Accept and pay.
Once you accept the offer and make your first payment, your policy will start, and you are protected.
How to buy whole life insurance
Fidelity Investments Life Insurance Company (FILI) does not offer whole life insurance, but if you decide that's the right type of insurance for you, here's how to go about buying it.
1. Research and compare policies.
Check out requirements (like medical exams) and costs at various insurance carriers to ensure you're getting the most coverage for your money. Account for the financial strength ratings of each carrier, too, since the promises they make are only as good as their ability to pay claims.
2. Consider riders.
Though add-ons are subject to state approval and raise your premiums, the extra peace of mind may be worth it to you.
3. Fill out an application.
You will be asked questions that deep-dive into personal details about your height, weight, job, prescription medications, medical conditions, and whether you smoke. Honest and complete answers help speed up the review process.
4. Complete any required follow-ups.
You may need to join a phone interview or undergo a medical exam.