Term vs Whole Life Insurance: Cost, Cash Value, Length

Term life insurance covers you for a set period and pays only if you die during that period, and most term policies build no cash value. Whole life and universal life are permanent insurance: they are meant to last much longer, they build cash value, and their premiums are higher. This guide compares all three on length, cash value, and cost structure, using rules from the Texas Department of Insurance (TDI), the NAIC, and the IRS. It does not recommend a product. It helps you work out which questions matter for you.

Key takeaways

• TDI says the two main types of life insurance are term and permanent. The two most common permanent types are whole life and universal life.
• Term premiums stay the same during the term but go up if you renew, because the new price is based on your age at renewal.
• Whole life premiums start higher than term but usually don't go up. Cash value builds slowly, with little to none in the first few years.
• Universal life lets you change premiums and the death benefit, but the policy could lapse if the cash value reaches zero.
• Texas policies have a free-look period, most policies have a grace period for missed payments, and insurers have a deadline to pay death claims.
• Before you buy, check that the agent and company are licensed with TDI.

What is the difference between term and whole life insurance?

The main differences are how long coverage lasts, whether the policy builds cash value, and how the premium behaves over time.

Term life covers a period you choose. TDI says that can be one year or anywhere from five to 30 years or longer. It pays a lump-sum death benefit only if you die during the term. When the term ends, the policy ends unless you pay to extend it.

Whole life stays in effect for your entire life unless you cash the policy in or stop paying premiums. Part of what you pay builds cash value over time.

Universal life is the other common permanent type. It stays in effect until a maturity date, usually age 95 or 100, as long as there is cash value in the policy.

Term vs whole vs universal life: side-by-side comparison

How does term life insurance work?

What happens to term premiums at renewal?

Your premium stays the same for the whole term. If you renew, the premium goes up, because it is based on your age at renewal, not your age when you first bought the policy. TDI suggests choosing a longer term to help avoid higher premiums later.

Is there an age limit for buying term life?

Yes, in most cases. TDI says most companies offer term life only up to a certain age, usually 70 or 80.

Renewable and convertible term

Renewability lets you extend a term policy for more terms regardless of your health and without a medical exam. The NAIC suggests asking two things before you rely on it: what the premiums will be when you renew, and whether you lose the right to renew at a certain age. If a policy is nonrenewable, you would have to apply for new coverage.

Convertibility lets you exchange a term policy for a permanent policy without a medical exam or health questions. Converting raises your premiums. Companies usually allow conversion only for a time, typically until you turn 65.

Types of term policies

The NAIC lists several kinds:

• Level term: fixed death benefit and premium, typically for 10, 20, or 30 years
• Decreasing term: often used for debts such as a mortgage
• Renewable term: can be extended for more terms
• Convertible term: can be switched to permanent coverage; premiums are usually higher for this feature
• Return-of-premium term: refunds part or all of your premiums if you outlive the term, and tends to cost more

How does whole life insurance work?

Whole life is built around predictability. TDI says premiums, death benefits, and cash values are guaranteed, and premiums usually don't go up.

Why cash value grows slowly at first

It takes years for a policy to build cash value. TDI says whole life usually has little to no cash value in the first few years. If you might drop the policy early, keep that in mind.

Are whole life dividends guaranteed?

No. The NAIC describes two kinds of whole life:

• Participating whole life may pay dividends based on the insurer's financial performance. It usually costs more.
• Nonparticipating whole life does not pay dividends.

If a policy pays dividends, you can take them in cash, add them to your cash value, or use them to pay premiums. TDI warns that dividends aren't guaranteed and could be lower than the company projected. Ask for a history of projected dividends compared with dividends actually paid.

What is the difference between whole life and universal life?

Universal life trades some of whole life's predictability for flexibility. You can change your premium and your death benefit. But if your premium is lower than the cost of insurance, the difference comes out of your cash value. If the cash value reaches zero, the policy could lapse.

Can a universal life policy lapse after years of payments?

Yes. Paying for many years does not by itself keep the policy in force. The company sends a yearly report showing your cash value and how long the policy might last. TDI says you might need to pay more in premiums to keep it in effect until maturity, so read each report.

Some universal life policies have a no-lapse guarantee. It applies only if premiums are paid on time.

Variable life

The NAIC says variable life policies have the greatest potential to build cash value and also the greatest risk of losing it. In Texas, agents who sell variable life must hold a federal securities license and a state insurance license.

Why does permanent life insurance cost more than term?

TDI gives two reasons. Permanent premiums pay for a savings feature, and you are buying coverage for a longer period. The NAIC frames it this way: term is meant to give lower-cost coverage for a specific period, while for a longer period, such as a lifetime, cash value insurance may be more cost effective.

For any policy, your price also depends on you. TDI says insurers look at your age, health, job, and tobacco and alcohol use, and some require a medical exam. Coverage costs more as you get older and if you have health problems. Prices vary by company and change, so get current quotes rather than relying on sample rates.

The NAIC also suggests asking for the highest premium you might have to pay to keep coverage. Premiums on many policies depend on the company's investment earnings, claims costs, and other expenses.

How does cash value work, and what are the tax rules?

Borrowing, withdrawing, and surrendering

• Loans: A policy loan that isn't paid back lowers the death benefit.
• Withdrawals: TDI says cash value is tax-deferred, and withdrawals are usually nontaxable until they exceed the total premiums you paid. Surrender fees may apply to early withdrawals.
• Taking it all: Withdrawing the entire cash value may cause the company to cancel the policy. That ends your coverage and may affect your taxes.
• If the policy ends: State laws require whole life policies to include nonforfeiture values. These are paid in cash or other insurance options if the policy ends because of missed payments or is surrendered.

TDI notes that agent charts showing cash value growth are usually projections, not promises, and you could earn less. Ask for a history of actual cash value growth.

Is the death benefit taxable?

The IRS says life insurance proceeds a beneficiary receives because of the insured's death generally aren't counted as gross income. Any interest received is taxable. Different rules apply if the policy was transferred for cash or other value.

What if I surrender a policy for cash?

The IRS says you include in income any proceeds above your cost. Your cost is generally the premiums you paid minus refunded premiums, rebates, dividends, or unrepaid loans that weren't already counted as income. You should receive Form 1099-R showing the taxable part. This is general information, not tax advice, so talk with a tax professional about your own situation.

Questions that point toward term or permanent coverage

These questions don't pick a product for you. They help you see which features matter.

• Does anyone rely on your income? If so, for how many years? A need with an end date lines up with how term is designed.
• Do you have a debt that shrinks over time, such as a mortgage? The NAIC notes decreasing term is often used for this.
• Do you want coverage for life, or just for a set period? Permanent policies are built for the longer horizon.
• Could you afford higher premiums if you renewed term at an older age? TDI suggests considering a longer term to help avoid higher premiums later. A licensed agent can show how renewal prices would change for you.
• Do you want guarantees or flexibility? Whole life leans toward guarantees. Universal life leans toward flexibility, with lapse risk.
• Are you counting on work coverage? TDI says employer group life typically ends when you leave your job, and the NAIC says the employer benefit is usually less than you need.

Buying after 50, or helping a parent decide

Several rules matter more as you get older:

• Renewal prices rise with age. A term policy renewed in your 60s is priced on your age at renewal.
• Term age limits. Most companies offer term only up to about age 70 or 80.
• Conversion deadlines. If you have convertible term, check the conversion cutoff, which is typically your 65th birthday. Conversion lets you switch without a medical exam or health questions, but only until the cutoff.
• Retirement review. TDI says that if no one relies on you for income, you might sell or stop a policy and get any built-up cash value. Ask about charges or fees first.
• Funeral-only coverage. If life insurance is only for funeral expenses, TDI says there are cheaper plans and suggests asking a trusted friend or financial adviser about other ways to pay. TDI also says prepaid funeral insurance can cost more than other types of life insurance, and a regular policy or savings might work better. For background on how this kind of coverage works, see our guide to final expense insurance explained.
• Medicaid. TDI says a policy's cash value counts as an asset when determining Medicaid eligibility. If a parent may need Medicaid, factor that in.

For a deeper look at choices at this age, read life insurance after 60.

What protections do Texas life insurance buyers have?

• Free-look period: TDI says Texas policies have a free-look period of at least 10 to 20 days. During it, you can cancel for any reason and get a full refund. The NAIC says the period is stated on the first page of the policy.
• Grace period: Most policies have a 31-day grace period after the premium due date. If you die during it, your beneficiary gets the death benefit minus the premium owed.
• Reinstatement: After the grace period, the policy lapses. Most companies will reinstate within five years if you pay overdue premiums with interest, and you may have to answer health questions.
• Contestable period: For two years, the company can deny payment because of wrong or missing information on your application. If it does, it must return your premiums. A reinstated or replacement policy starts a new contestable period.
• Claim payment: Texas companies must pay the death benefit within two months after getting proof of death and verifying the beneficiary. For individual policies, they must also pay interest from the time they got proof of death until they agree to pay the death benefit.

Should you replace an old policy with a new one?

Weigh these points from TDI first:

• New policies take longer to build cash value and pay dividends.
• The two-year contestable period starts over.
• Surrender fees may reduce your old policy's cash value.
• You will probably face new health questions.

It is illegal for an agent to replace your policy just to earn a new commission. The NAIC also advises that you not cancel a current policy until you have the new one.

How do you check an agent and an insurance company?

Use TDI's "Look up a company or agent" tool to confirm a license and to see a company's financial rating and complaint history. You can also call the TDI Consumer Help Line at 800-252-3439. Our guide on how to verify a Texas insurance agent license walks through it.

Licensing also matters if a company fails. The Texas Life and Health Insurance Guaranty Association covers life insurance if a member insurer fails, though some claims have dollar limits. If an unlicensed company fails, there is no guaranty association to help.

Steps to compare term and permanent life insurance

1. Write down why you want coverage, who depends on you, and for how many years.
2. Check any coverage you already have, including group life from work.
3. Get quotes for term and permanent policies with the same death benefit, so you compare like with like.
4. For term, ask about renewal prices, renewal age limits, and the conversion deadline.
5. For permanent coverage, ask for the highest premium you might pay, and for dividend and cash value history rather than projections alone.
6. Verify the agent's and company's licenses with TDI.
7. Use the free-look period to read the policy and confirm your beneficiary.

Where to get help

MeetBrokers is free to use. Every listed agent holds a state license that anyone can verify by National Producer Number. Our guide to the National Producer Number explains how. Profiles marked "unclaimed" come from public licensing records.

You can browse licensed life insurance agents in Texas or life insurance agents in every state. When you're ready, send a request to a licensed agent you choose. Your request goes only to that agent. MeetBrokers is not connected with or endorsed by the U.S. government or the federal Medicare program.