4 Key Ways Whole Life Insurance Differs From Term Life Insurance

By Barbara Marquand

Whether it's better to buy term life or whole life is one of the most asked questions about life insurance.

The answer depends on your needs, though, and before picking a policy, you should understand the differences. Here are the four main ways whole life insurance differs from term life.

1. Whole life insurance is permanent

The policy covers you for your entire life as long as you keep paying for it. Term life is temporary. It covers you for only a certain period -- such as 10, 20 or 30 years -- and no longer pays a death benefit after the term has ended.

2. Whole life has cash value

Permanent life insurance, such as whole life, features a savings component called cash value. A portion of your premiums go to the cash account, which accumulates slowly tax-deferred. Once you've built up enough, you can borrow against the cash value or surrender the policy for the cash. Term life insurance has no cash value. It's pure life insurance, not an investment product.

3. Whole life is more complex than term life

The cash value account makes permanent life insurance more complex than term life. Before you buy, you'll need to understand the potential return on the cash value, how the money can be used, and the effects on your policy's payout if you make a withdrawal.

Whole life guarantees a fixed rate of growth on the cash value. Other types of permanent life insurance, such as indexed universal or variable universal life, have varying growth rates.

4. Whole life is more expensive than term life

A term life insurance policy will cost much less than a whole life insurance policy with the same amount of coverage. Don't buy a whole life policy if you're not sure you can afford it. Sure, the cash value can eventually build to a tidy sum, but only if you hold on to the policy for many years. If you have to drop it before then, you'll have spent a lot of money and have little to show for it. Plus, you might have to pay a surrender fee and you'll have no life insurance coverage.

Whole life insurance can be a good fit for some people. For instance, it might make sense if you have a lifelong financial dependent, such as a child with special needs, or a large estate that will be subject to estate taxes. Your heirs could use the money to pay the estate taxes.

But if you're on a tight budget and just need temporary coverage that could help your family pay off debts or replace your income, term life insurance is the way to go.

Barbara Marquand is a staff writer at NerdWallet, a personal finance website. Email: bmarquand@nerdwallet.com. Twitter: @barbaramarquand.