What's the Difference Between Term Life and Whole Life Insurance?

The main decision you’ll have to make when choosing a life insurance policy is the one between term life insurance and permanent life insurance. Below, we’re mainly going to focus on a particular, popular form of permanent life known as ‘whole life,’ although there are several other options.

Choosing a life insurance plan is a bit more consequential than picking a pasta-based entree. After all, life insurance helps provide financial protection for your loved ones after you’re no longer around. That’s serious stuff.

We know things can get confusing. There’s no one-size-fits-all life insurance policy. But the decision becomes a little easier once you know the different types of life insurance that are available, and the key characteristics of each. 

We’ll lay out some of the pros and cons of both term and whole life, so that you can feel confident in making an educated decision.

TL;DR if you’re in a rush

Let’s be straight up front: At Lemonade, we only offer life policies. But we’re here to give you the info on both types of policies. 

Here’s the short version:

Term life insurance is an affordable and simple option to help protect your loved ones.

If you pay your premiums and you pass away while you’re still covered, the tax-free payout (‘death benefit’) goes to your chosen beneficiaries. The policy has no cash value, and pays out only if you die during your selected term. 

What do we mean by ‘affordable’? With Lemonade’s term life offering, monthly premiums can start as low as $8/month. Your specific quote will depend on many factors, including the coverage amount you choose, so there’s no one-size-fits-all answer to a question like “how much is a million dollar Lemonade life insurance policy?”

On the other hand, a whole life insurance policy has much higher premiums, but the insurer is basically guaranteed to pay out the tax-free death benefit when you pass on (with some exceptions). The big selling point here is that, over time, a whole life insurance policy builds some additional cash value.

Many find the higher cost of whole life prohibitive, but some find the policy’s cash value component a real incentive. You could also consider just parking any savings you have in a different sort of interest-bearing account, like an index fund. It’s something to discuss with a financial advisor, if you have one. 

Ask yourself: Why exactly are you buying a life insurance policy?

Let’s say you’re looking for insurance that’s affordable. You have a family with certain financial needs that you want to help provide for in case you should pass on unexpectedly. 

Or you want to offer financial protection for your family in case you should die before, say, the mortgage is paid off or the kids are educated.

If all goes to plan, after those costs are taken care of, you won’t need the payout cushion life insurance would provide, because you will have built up a retirement account or other savings to get you through the years. In that case, term life insurance, which covers a set period of time (or ‘term’)—which you decide on according to your own needs—is right for you.

But okay, maybe you’ve got quite a bit more money to play with (lucky you!). You want a policy that basically guarantees a payout when you die, whether that’s in five years or in five decades.

You might be shopping for a life insurance policy that will help you pass on an inheritance to your family, and are looking for a tax-deferred, interest-bearing savings vehicle to help with that. Or you’ll have a large estate to leave behind and are looking for a way to cover estate taxes, so your heirs won’t have to pay them out of the inheritance. 

In any of those cases, a whole life policy may be the right choice. 

Got it? Well, then, let’s get into the specifics of the different kinds of policies.

How do costs compare between whole life and term life?

It’s a bit hard to make a direct, apples-to-apples comparison between the two kinds of policies, because they’re so different, as we’ll see below.

One is temporary, one is permanent. Term life typically doesn’t pay out anything, if you’re lucky—because hey, you’re still alive! Meanwhile whole life, as a type of ‘permanent’ life insurance, almost always pays out (because, well, we all die at some point, at least until Elon Musk figures out a way to change that).

But in case it’s helpful, let’s compare premiums. 

Consider a policy with a $1 million death benefit:

According to Nerdwallet, if you’re a 40-year-old man taking out a 20-year, $500,000 term life insurance policy as of 2024, you might pay about $26/month in premiums.. 

For a whole life policy with the same death benefit, meanwhile, that person could end up paying about $300-400/month. That’s not a typo.

How does term life work?

The principal advantage of term life insurance is that it’s substantially simpler and less expensive than whole life insurance. Reflecting its simplicity, term life is often called ‘pure’ life insurance. See? You already know more than before!

How does it work? Well, first you pick a period of time—a term. If you should pass away before the end of the term—as long as you’ve kept up with your premium payments—your insurer issues the payout to the beneficiaries you chose. That payment is also referred to as the ‘death benefit.’ We know. It’s a bit of a downer (but would make a decent name for a heavy metal band…)

Remember, there are circumstances where insurance companies do not pay.

• If any information given in the application for insurance is inaccurate… sorry, no death benefit.
• If the policyholder commits suicide within two years of taking out the policy, insurers don’t issue a payment, though they often refund the premiums paid.
• If your beneficiary takes your life in order to get the money—the plot of many a movie—insurers do not make the payment, under what’s known as the ‘slayer rule.’

The big thing to keep in mind is that term life covers you only for the term of the policy. If you have a ten-year term life insurance policy, and you live another eleven years, there’s no payout. In this way, life insurance companies are able to keep term life insurance affordable, since (yay!) most people outlive their policies.

Are there benefits to whole life insurance?

The main bonus of whole life insurance, a type of permanent life insurance, is that it covers you for your entire life. 

What do you get in exchange for a monthly premium that might be significantly higher?

Life insurance companies will—with some exceptions—pay out the whole life policy’s death benefit when you pass, whether in five years or fifty years. Whole life plans also have other pluses, including that the insurance company invests a portion of your premiums in a tax-deferred cash-value component that bears interest at a rate determined by the insurer, so your policy builds cash value over time.

That cash value component of whole life brings a few benefits. You can borrow against the cash value of your policy should you need to, to cover retirement costs, or even to pay monthly insurance premiums.

Those who earn big paychecks and who have maxed out other retirement accounts might find whole life insurance policies appealing as yet another vehicle for tax-deferred savings. Also, a whole life insurance policy can be helpful in estate planning if the policyholder has a large amount to pass on —we’re talking over $11 million for an individual or more than $23 million for a couple—and wants their loved ones to be able to use the payout to cover estate taxes.

Are you reading this and thinking, ‘Damn, whole life insurance sounds pretty confusing, and also maybe not for me since I don’t have a multi-million dollar estate to deal with?’ We won’t argue with you there.

What are the drawbacks of whole life insurance?

One of the big negatives of whole life insurance is that, depending on your age, health, and other particulars, the premiums could be five, ten, or even fifteen times higher than for term life insurance. 

Some people find the payments so high that they eventually let the policy lapse. In that case, they may want to simply walk away with the cash value of the policy, but keep in mind that there are penalties if you do that.

Remember, too, that risk and return are generally inversely related. The cash value a whole life policy accrues is based on a guaranteed interest rate set by your insurer. But you could also consider purchasing a more affordable term life policy, and then investing the money you’re saving in things like treasury bonds or index funds.

But hey, we’re not financial advisors, and we’re not pretending to be. It’s just a good idea to ponder all of this before discussing things with whatever expert you trust with your money.

Okay, so…which is right for me?

Choosing between term life insurance or a form of permanent life insurance is a very personal decision. Your best bet is to educate yourself—like you are right now!—and then take some time to mull over the best option for your own circumstances. Check out our ultimate guide to life insurance to take an even deeper dive into the particulars.

Many financial experts, including powerhouse advisor and author Suze Orman, say that term life insurance is right for most people. She even has whole life insurance on her ‘hate list’ of financial products!

If you have limited resources and finite costs you want to cover with the policy, term life insurance may offer affordable peace of mind.

If you think that you can grow your money better than an insurance company can, then one option is to buy an affordable term policy and use the cash you save to invest. As we mentioned, you don’t have to be a financial wizard—it could be as easy as putting money in an index fund, and forgetting about it for three decades.

Some financial gurus have a mantra, in fact: ‘Buy term, and invest the difference.’ We’re a little biased, but we couldn’t agree more. Maybe it’s worth applying for a life insurance quote?

Hey, we hope you learned something here! We’d still suggest you chat with a financial advisor before making any major decisions.

A few quick words, because we <3 our lawyers: This post is general in nature, and any statement in it doesn’t alter the terms, conditions, exclusions, or limitations of policies issued by Lemonade, which differ according to your state of residence. You’re encouraged to discuss your specific circumstances with your own professional advisors. The purpose of this post is merely to provide you with info and insights you can use to make such discussions more productive! Naturally, all comments by, or references to, third parties represent their own views, and Lemonade assumes no responsibility for them. Coverage may not be available in all states.