Term vs. whole life insurance: what's the difference?

Term life is the simplest form of life insurance. You're covered for a set period (the "term"), and if you pass away during that window, your beneficiaries receive the benefit. The National Association of Insurance Commissioners describes a term policy as one purchased for a period of time, with coverage that expires when that period ends; common lengths run anywhere from one year up to about 30 years.

Because the coverage is temporary, term policies generally have no cash value; your premiums go toward the death benefit and the cost of insuring you. The Insurance Information Institute and NAIC both note that this typically makes term coverage lower in cost than permanent coverage for the same benefit amount. If you outlive the term, coverage usually ends, though many policies can be renewed or converted (often at a higher premium).

Permanent life insurance is designed to last your entire life, as long as premiums are paid. Whole life is the traditional version. The National Association of Insurance Commissioners notes you can keep this kind of coverage for as long as you need it, rather than for a fixed term.

Permanent policies also build cash value over time. As the Insurance Information Institute explains, the portion of your premium that isn't used for the death benefit can accumulate, and that cash value can generally be borrowed against or withdrawn under certain conditions. That lifelong coverage and savings component is why permanent policies usually carry higher premiums than term policies for the same death benefit.

A useful starting question, suggested by the National Association of Insurance Commissioners, is: how many years do you anticipate needing the death benefit? If your biggest financial responsibilities are temporary, such as a mortgage, raising children, or replacing income during your working years, term coverage is often a natural fit because it lines up with that window at a lower cost.

If you want coverage that never expires, or you specifically value the cash-value feature, permanent insurance may be worth the higher premium. Many families use a mix. There's no universal answer, and as the NAIC puts it, everyone's financial situation is different. The best move is to match the coverage to your actual obligations and budget.