Should I buy term or whole life insurance?
Compare term life vs whole life insurance costs, coverage, and investment returns to make the right decision for your family.
By ShouldICalc Team
Updated January 2025 · See our methodology
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Trade-offs to Consider
Every decision has pros and cons. Here's what to weigh:
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Money
Term is 10-15x cheaper for same coverage. 'Buy term and invest the difference' almost always builds more wealth than whole life cash value.
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Time
Term requires renewal shopping. Whole life is set-and-forget (but that simplicity costs significantly).
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Quality
Both pay death benefits equally. Whole life adds cash value that grows slowly. But you can build wealth more efficiently elsewhere.
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Convenience
Whole life is simpler—one payment handles insurance and 'savings.' But that simplicity comes at a steep price in lower returns.
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Frequently Asked Questions
Why is term life so much cheaper than whole life?
What does 'buy term and invest the difference' mean?
When does whole life insurance make sense?
What happens when term insurance expires?
Term vs Whole Life Insurance: The Complete Analysis
This is one of the most important financial decisions many families make—and one of the most frequently gotten wrong due to aggressive whole life sales tactics. Here’s the honest math.
The Cost Comparison
$500,000 coverage, 35-year-old healthy non-smoker:
| Policy Type | Monthly Cost | Annual Cost | 20-Year Total Premiums |
|---|---|---|---|
| 20-Year Term | $25-35 | $300-420 | $6,000-8,400 |
| 30-Year Term | $40-55 | $480-660 | $9,600-13,200 |
| Whole Life | $350-500 | $4,200-6,000 | $84,000-120,000 |
Whole life costs 10-15x more for the same death benefit.
The question is: Is that extra $4,000-5,500/year worth it?
What You Get for the Extra Money
Whole life includes:
- Lifetime coverage - Never expires (if you keep paying)
- Cash value - Savings component that grows tax-deferred
- Fixed premiums - Never increases
- Potential dividends - With participating policies
But consider the trade-offs:
- Cash value grows at 1-3% (low returns)
- You can’t access cash value without borrowing against it
- If you die, beneficiaries get death benefit OR cash value (not both in most cases)
- Early surrender has heavy fees
The “Buy Term and Invest the Difference” Strategy
This is what most financial advisors recommend:
Monthly comparison:
- Whole life premium: $450/month
- Term premium: $30/month
- Difference to invest: $420/month
After 20 years at 7% average return:
| Strategy | Death Benefit | Cash/Investment Value | Total Value |
|---|---|---|---|
| Whole life | $500,000 | ~$75,000 cash value | $500,000 (one or other) |
| Term + invest | $500,000 | ~$219,000 investments | $719,000 (both) |
Term + investing wins by $144,000+ in this example.
The Math Behind Whole Life Cash Value
Whole life cash value growth is underwhelming:
| Year | Premiums Paid | Typical Cash Value | Cash Value % of Premiums |
|---|---|---|---|
| 5 | $27,000 | $8,000 | 30% |
| 10 | $54,000 | $28,000 | 52% |
| 15 | $81,000 | $52,000 | 64% |
| 20 | $108,000 | $75,000 | 69% |
You’re underwater for years. Early surrender means losing money.
Compare to investing the difference at 7%:
| Year | Amount Invested | Investment Value |
|---|---|---|
| 5 | $25,200 | $30,000 |
| 10 | $50,400 | $72,000 |
| 15 | $75,600 | $134,000 |
| 20 | $100,800 | $219,000 |
Investing the difference builds nearly 3x the wealth.
The Opportunity Cost of Capital
$420/month invested vs locked in whole life cash value:
| Timeframe | Whole Life Cash Value | Invested at 7% | Difference |
|---|---|---|---|
| 10 years | $28,000 | $72,000 | $44,000 |
| 20 years | $75,000 | $219,000 | $144,000 |
| 30 years | $140,000 | $509,000 | $369,000 |
The opportunity cost is staggering. That’s retirement money lost to an inferior vehicle.
When Whole Life Actually Makes Sense
Legitimate use cases (rare):
-
Ultra-high net worth estate planning
- Estate over $13M+ (2024 estate tax exemption)
- Insurance pays estate taxes so heirs don’t liquidate assets
- Used in irrevocable life insurance trusts (ILITs)
-
Special needs planning
- Disabled dependent who needs lifetime care
- Permanent coverage guarantees funds whenever you die
-
Business succession
- Buy-sell agreements funded by permanent insurance
- Key person insurance for irreplaceable executives
-
Forced savings for the undisciplined
- If you genuinely won’t invest the difference
- Whole life forces saving (at poor returns)
- Still suboptimal, but better than nothing
For everyone else: Term insurance + disciplined investing wins.
What Whole Life Salespeople Don’t Tell You
Red flags in whole life sales pitches:
-
“It’s an investment” - It’s insurance with a savings component that earns 1-3%. It’s not an investment.
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“Tax-free growth” - True, but Roth IRAs and 529s also offer tax-free growth with better returns.
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“Guaranteed returns” - Guaranteed low returns. Index funds average 7-10% long-term.
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“You can borrow against it” - Yes, paying interest on your own money. Just invest in accessible accounts.
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“Premiums never increase” - Neither would term if you lock a 30-year term.
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High commissions - Agents earn 50-100% of first-year premiums on whole life. Term commissions are minimal. This incentive shapes their advice.
How Much Life Insurance Do You Need?
Common calculation methods:
Income replacement:
- 10-12x your annual income
- $75,000 salary × 10 = $750,000 coverage
Needs-based:
- Mortgage payoff: $300,000
- Kids’ college: $100,000
- Income replacement (10 years): $500,000
- Funeral costs: $15,000
- Total: $915,000
Subtract:
- Existing savings: -$150,000
- Spouse’s income capacity: -$100,000
- Net need: $665,000
Round to $700,000 term policy.
The Right Term Length
Match term to your need horizon:
| Life Stage | Recommended Term | Why |
|---|---|---|
| New parent, age 30 | 25-30 year term | Until kids are independent |
| Parent, age 40 | 20 year term | Until kids are independent |
| Parent, age 50 | 10-15 year term | Until retirement assets cover needs |
| No dependents | Minimal or none | No one relies on your income |
The goal: By term expiration, you’ve built enough wealth that you no longer need insurance. You become self-insured.
What Happens When Term Expires?
Options at term end:
- Let it expire - Best case: you’re now wealthy enough to not need it
- Renew at current age rates - Much more expensive
- Convert to permanent - Most policies allow conversion without medical exam
- Buy new term - If you still need coverage and are healthy
Ideal scenario: You buy 20-year term at 35. At 55, kids are grown, mortgage is paid, you have $500k+ invested. You don’t need life insurance anymore.
Making the Decision
Choose term life if:
- ☑️ You need coverage for a specific period (kids growing up)
- ☑️ You’re disciplined enough to invest the premium difference
- ☑️ You want maximum coverage for minimum cost
- ☑️ You’re not ultra-wealthy with estate tax concerns
- ☑️ You believe in “buy term, invest the difference”
Consider whole life only if:
- ☑️ You have $10M+ estate and need estate planning tools
- ☑️ You have special needs dependents requiring permanent coverage
- ☑️ You absolutely will not invest the difference (last resort)
- ☑️ You have a legitimate business insurance need
The Bottom Line
For 95%+ of people, term life insurance is the right choice.
The math is clear:
- Same coverage for 10-15x lower cost
- Invest the difference → More wealth than whole life cash value
- When term expires, you’re financially independent
Whole life insurance is one of the most oversold financial products. The high commissions create misaligned incentives. Salespeople benefit from selling you the expensive option.
The financially optimal strategy: Buy the cheapest term policy that meets your coverage needs, then invest the premium savings in low-cost index funds. It’s not even close.
About This Calculator
Premium estimates based on industry averages for healthy non-smokers. Actual rates vary by health, age, and insurer. Investment return assumptions use historical stock market averages; actual returns vary. Cash value projections based on typical whole life policy illustrations. Consult a fee-only financial advisor for personalized guidance. Last updated January 2025.