Life insurance comes in two main forms: term life and whole or permanent life. Both types come with benefits and drawbacks. Knowing which works best for your situation will help you provide the right protection for your family.
While there’s really only one kind of term insurance, permanent insurance has several variations. Here, we’ll talk about whole life insurance, the most commonly used permanent policy.
Ask almost anyone – except an insurance salesman – and they’ll try to steer you toward term life. For many, probably most, people that’s absolutely the right choice. But there are situations where getting a whole life policy works better, if you can swing it.
Here’s what you need to know about the different types of life insurance, how to figure out which is better for you, and how to pick a policy.
Why You Need Life Insurance
When anyone depends on you financially, you need life insurance. In fact, if anyone depends on you to take care of them in non-financial ways, like a stay-at-home parent or a caregiver for your parent, you need life insurance. If something happens to you, they’ll need that reliable financial support more than ever. This is how you provide it.
Life insurance sometimes gets a bad rap, but that’s not really the life insurance itself. It’s more about super complicated policies that work more like tax-advantaged investment accounts. That’s not what we’re talking about here.
When you have the right life insurance for your situation, you are protecting your family – whoever that may be – from financial devastation. You’re giving the people you love the resources to take care of themselves, allow themselves time to grieve and heal. You’re taking away one of the biggest stresses in life and subbing it with financial security.
How Term Life Insurance Works
Term life insurance offers you financial coverage in case you die during a specific period of time (the term) in exchange for premium payments. Once the term is up, the policy expires unless you renew it or replace it. If you die after the term is up, no one will get a payout.
The idea behind this is that at some point, your family won’t need this safety net anymore. Kids will be grown up with their own financial lives. The mortgage will be paid off. You’ll have put away enough during your lifetime to cover your retirement years. So life insurance after that could be unnecessary… especially because premiums can get much more expensive as you get older.
Typical terms are 10, 20, or 30 years. Some insurers offer policy terms as short as 1 year. Depending on your needs, you might get a single term policy or go for layers of policies. For example, layering (also called laddering) might look like getting a 30-year policy which would last until you retired and mortgage was paid off and another 20-year policy that would last until your kids were self-sufficient. That layering beefs up coverage while that’s needed but lets it drop off once the need has passed.
Term life premiums are also much less expensive than permanent life policies. That’s the main reason term policies are common choice – they’re much more affordable.
The five main factors that affect premium pricing include:
- Gender: men’s premiums are higher than women’s
- Age: premiums increase as you get older.
- Smoking: smokers will pay more than nonsmokers.
- Health: whether you have any current or chronic health conditions
- Lifestyle: having a dangerous job (like firefighter) or dangerous hobbies (like mountain climbing)
Here’s the ballpark: On average, a healthy 30-year-old nonsmoking woman could expect to pay $183/year for a 20-year term policy. A healthy 30-year-old nonsmoking man would pay, on average, $213/year. [Note: Data was retrieved on October 1, 2026 by NerdWallet from Lifestein.com.]
How Whole Life Insurance Works
Whole life insurance, a type of permanent insurance, has two components: life insurance and cash value.
Like the name implies, this insurance covers you for your whole life… unless you stop paying the premiums. While the policy is in force, cash value builds over time. Part of that growth comes from a portion of your premiums. The rest comes from the guaranteed minimum growth rate, usually between 1% and 4%. If your policy is a participating policy, you can also receive annual dividends from the insurance company that you can use to build cash value or to pay premiums.
One of the main benefits of whole life policies is access to that cash value. You can borrow from it at any time with no tax hit. Or withdraw from it tax-free, as long as you don’t withdraw more than you’ve paid in premiums (then there would be a tax situation). Doing either of these may reduce the eventual death benefit depending on the balance of the cash value at the time of payout.
Whole life insurance also comes with level premiums for the duration – they never change unless you make a change to the policy. What does change is the portion that goes to cash value vs the portion that goes toward the death benefit.
Premiums for permanent policies are affected by the same factors as term premiums: gender, age, health, and lifestyle. But they are much more costly. On average, a healthy 30-year-old nonsmoking woman could expect to pay $645/year for a 20-year term policy. A healthy 30-year-old nonsmoking man would pay, on average, $788/year. [Note: Data was retrieved on October 1, 2026 by NerdWallet from Lifestein.com.]
Is Term or Whole Life Better for You?
For many people, term life insurance makes the most financial sense. You buy coverage during the periods of your life where people will be relying on you. It’s more cost-effective and gives your family a safety net while they need it.
For other families, though, whole life insurance is the way to go. If you have a dependent who will need lifelong care, such as a special needs child, whole life insurance can help you make sure they’ll always be provided for. That safety net doesn’t come with a fixed end date.
The other main reasons for getting whole life insurance are financial. These policies can offer supplemental cash flow in retirement, through withdrawals and policy loans. If all of your retirement accounts are maxed out, a whole life policy can increase your tax-advantaged savings. Whole life policies are also often used to help pay estate and inheritance taxes for high-net-worth individuals, so assets don’t need to be sold off to pay those tax bills.
What all life insurance policies have in common
The most important feature of all life insurance policies is the tax-free death benefit. That’s the money that will be paid out to the named beneficiaries when the insured person dies.
In addition to that, all kinds of life insurance have some features in common:
- Premiums: both whole life and term life insurance come with fixed premiums
- Riders: policy add-ons you can buy for extra fees
- Underwriting: the process the insurance company uses to approve you for a policy and set your premiums
These basics are common to both kinds of life insurance policies. And that’s where the similarities end.
How term and whole life policies differ
Term and whole policies have many crucial differences. The most obvious of those is the coverage window. Term life insurance covers you for a specific window of time – the term – usually ranging from 10 to 30 years. Whole life insurance covers you for your whole life (yep, it’s right in the name) as long as you keep up premiums.
Other key differences include:
- Initial cost of premiums: whole life premiums are more expensive than term life premiums, typically 4 to 15 times higher depending on the circumstances
- Renewal premiums: once a term policy expires, you’ll pay higher premiums to reinstate your life insurance (because of age), where whole life premiums remain steady for your lifetime
- Dividends: many whole life policies pay out dividends to policyholders – these are called participating policies – that can help with premium payments, build cash value, or be paid out as cash
- Cash value: whole life policies have a cash value component that builds over time, while term life does not.
- Surrender charges: early cancellation fees for whole life policies that don’t apply to term policies (which expire at the end of term)
Now you know the basics of term and whole life insurance policies. Your next step is figuring out which policy you want to buy.
How to Pick Your Policy
Once you know what whether term or whole life works better for your situation, you’re ready to choose an insurance company and a policy. Both pieces here are important. You want to make sure the insurance company you choose is reliable. And you want to make sure your policy provides what your family needs – not less, not more.
Once you’ve decided whether term or whole life insurance is best for your situation, you’ll have to figure out how much coverage your family needs. You can find out more about how to do that here. If you opt for term life, figure out how long you want the term to last, based on your unique situation.
Next, you’ll do some research to compare similar insurance policies and premiums. A lot of insurance companies offer online quotes, making the process as easy on you as possible (after all, they want your premiums for decades to come). You can also use a site like PolicyGenius to compare multiple policies. Alternatively, you can work with an insurance broker (as opposed to an insurance agent) to help you find the right policy. These professionals work with many different insurance companies, so they represent you and what’s best for you rather than any one company.
Step 3: Decide if you’re interested in any riders, add-on options that effectively personalize your policy. You may be able to purchase riders for things like:
- Waiver of premium – covers your premiums if something happens that leaves you unable to work
- Accidental death – increases the death benefit in case you die in an accident
- Long-term care – pays out benefits while the policyholder is alive and in long-term care
- Guaranteed renewability – ensures that you’ll be able to renew a term policy with no medical exam
Of course, riders cost money so they increase your premiums. But if a rider offers protection that you need, it’s worth it.
Now that you’ve decided on your policy details, it’s time to fill out the application. Every insurer has their own batch of questions and requirements. Generally, they’ll ask you a lot of personal questions and require get a physical exam. After your application is submitted, the insurance company may come back to you for additional information. They may ask you come for an in-person interview or want to talk with you on the phone. Complete all those requirements and they’ll make you an offer.
As soon as you officially accept the offer and pay the first premium, your policy will be activated. And your loved ones will be protected.
Need Some Help Figuring Out Which Type of Life Insurance Policy is Best for You?
I can help with that.
If all of this feels overwhelming and you’re not sure which type of life insurance to choose, I get it. There’s a lot involved here and you want to make the best decision for yourself and your family in the short and long-term.
As a CPA, I am not allowed to recommend any specific life insurance policy. During a personal financial coaching session I can help you figure out which type of life insurance policy will be best for you and your dependents. Then you can speak with an insurance broker with a clear plan for what you need and what goals you are trying to achieve.
These personal financial coaching sessions are designed to give you a clear understanding of your current financial situation, so you can plan for your future and make the best decisions possible for both. No one knows what will happen tomorrow. But having the right plan in place for your family, should you not be there for them, is a gift of security you can give them today.
A single session is $250 and we can get a lot done in that time. Depending on your situation, one session may be all you need to figure this out.
Click on the button below to schedule your personal financial coaching session now.