TL;DR: When deciding how much life insurance you need, a general rule of thumb that many financial experts use is getting coverage that is 10 - 15x your pre-tax income.
This enables the lump sum to cover any outstanding mortgage, debt, children's education, and replace your income for living expenses.
What is Life Insurance?
In order to understand the difference between term and whole life, it’s important to look at what life insurance is and the purpose it serves in your financial plan. Then you can make an informed decision which type of life insurance is best for you and your particular situation.
What’s life insurance and how does it work?
Life insurance is a contract with a life insurance company. You pay them the premiums. If you pass away while you’re insured, they pay your beneficiaries a lump sum.
What’s is life insurance for?
The purpose of life insurance is to protect your income should you pass away. Your family depends on you for your income to pay the mortgage, bills, and put food on the table.
1 in 17 children under the age of 18 suffering the loss of a parent, and not having the right amount of life insurance in place causes years of financial stress for families across the U.S.
Life insurance isn’t just for the breadwinner though. According to salary.com, if you paid for the services of a stay-at-home parent the median salary would be $178,201. Many parents work around the clock and you would have to pay; a chef, house cleaner, childcare, driver, laundry service, and more.
Term life insurance covers you for a specific time period (known as the term). The amount of time is usually between 10 and 30 years. In the event of your death, the amount you are covered for (the death benefit) is paid out in a lump sum to your family (the beneficiary).
Term life is also known as pure insurance. It works just like other insurance you may have (car insurance, homeowners and renters insurance). The insurance company covers something that is a risk or liability and you pay them premiums. In return the insurance company will cover you for unexpected events that are often too large for most people to afford out of pocket, like replacing a car.
For life insurance, this is ensuring that your family has an income if you’re no longer there to provide it.
At the end of your term, you stop paying premiums, your insurance ends, and you are no longer covered. The goal is to be “self-insured” by the end of your term. For a typical family this could look like, you have paid off the mortgage, your kids have flown the nest, and you have a nest egg for retirement.
What is Whole Life Insurance?
If the name hasn’t given it away already, Whole life insurance has permanent coverage, that covers you for your entire life.
Whole life is one of the three main types of permanent life insurance: 1. Traditional whole life 2. Universal life 3. Variable universal life
Whole life insurance has monthly or annual payments that stay the same (level premiums). Typically you pay premiums for a set period of time (such as 20 years) and you keep the same amount of coverage, even after you’ve finished paying the premiums.
With whole life you can build “cash value” in a tax-deferred investment account. You can also take out a loan against the cash value.
Comparing Term and Whole Life Insurance
The main difference between term and whole life insurance is that term life insurance is a lot more affordable which means you can get the coverage your family needs within your budget.
Whole life insurance is far more complex and has a savings or investment element built in, where part of your payments go towards a cash value.
Term is typically 10x cheaper than whole life for the same amount of coverage. It’s hard to get the amount of coverage you need with whole life because it’s that much more expensive. This can leave people underinsured.
A portion of your whole life premium goes toward cash value. On the surface, this sounds great but on average a whole life insurance has a low rate of return (average 3–4%).
Typically the life insurance company absorbs the cash value upon the event of your death. This means your beneficiary will receive the lump sum payout but not the cash that you’ve been building—unless you pay extra to purchase what’s known as a ‘rider’ to override this.
5 - 30 years
Low ($30 a month)
High ($400 a month)
Stays the same
Stays the same
Lump sum payout
Builds cash value
For a healthy 30-year-old woman buying a 30-year, $500,000 from Bello *For a healthy 30-year-old woman buying a $500,000 policy. Source: StateFarm Return to table
Term and Whole Life Cost Comparison
We’ve compared term and whole life prices side-by-side, so that you can see the difference.
Term price (monthly)
Whole Life price (monthly)
The example above shows term and whole life policies for a 30 year old woman with $500,000 in coverage. They both have level monthly payments.
You can see that term gives you the same amount of coverage for just a fraction of the price. Whole Life can be up to 10 - 15x more expensive.
he goal of life insurance is to cover your income in the event of your death. As a general rule of thumb you’ll want 10-15x your income in life insurance coverage.
Level term life insurance offers an easy and affordable way to get the coverage you need for the time period that you need it.
It’s often the case that you cannot get the amount of coverage you need with whole life insurance. Plus, it has a low rate of return and you lose the cash value in the event of your death.
For these reasons well known finance leaders, such as Dave Ramsey, suggest that you’re better off financially getting term life insurance and keeping your investments in other vehicles like IRA’s and 410k’s.
In full transparency, we earn money when you buy life insurance through Bello. Insurance Agents are normally paid based on the premium amount (price).
This means Agents can typically make a lot more commission from whole life than term (the premiums are roughly 10x higher). Despite this, we still choose not to offer whole life insurance because it’s a not a financial product that we ourselves use nor would we recommend to our own friends and family.
Term life insurance is easy to understand and is more affordable than whole life insurance.
Tom is the Founder of Bello and life insurance expert. He built Bello to make life insurance simple to understand and even easier to get.
What to read next
Term vs. whole life insurance – which is better?
How much life insurance coverage do I need?
How much does life insurance cost? 2021 rates.
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