Life insurance can help protect the people who would face financial hardship after your death. It may replace lost income, pay debts, cover childcare, or provide money for funeral expenses.
The challenge is finding coverage that meets those needs without putting too much pressure on the household budget. Term life and whole life insurance can both provide a death benefit, but they work in different ways. Term life covers a limited period and is generally less expensive. Whole life can provide lifelong coverage and build cash value, but it usually costs considerably more for the same death benefit.
This article focuses on coverage available in the United States.
Whole Life Insurance vs. Term Life Insurance at a Glance
| Question | Term life insurance | Whole life insurance |
|---|---|---|
| How long does the coverage last? | It covers a stated period, such as 10 or 20 years. | It can remain in force for the insured person’s lifetime if the required premiums are paid. |
| How much does it cost? | It generally offers a lower initial premium for each dollar of death benefit. | It generally costs more because it combines lifelong coverage with a cash-value feature. |
| Does it build cash value? | Most term policies do not build cash value. | A portion of the policy’s value can accumulate over time. |
| When is a death benefit paid? | The death benefit is paid when the insured person dies during the covered term and the policy is active. | The death benefit is paid whenever the insured person dies, provided the policy is still in force and the claim is covered. |
| Can the premium change? | A level-term premium normally stays fixed during the selected term. Renewal premiums can rise sharply after that period. | Traditional whole life policies usually follow a fixed premium schedule, although the guarantees depend on the contract. |
| What needs does it usually address? | It is commonly used for temporary needs such as income replacement, dependent children, a mortgage, or other debts. | It is commonly used for permanent needs such as final expenses, a lifelong dependent, or estate planning. |
| What is the main drawback? | The policy can end before the insured person dies, leaving no benefit and usually no cash value. | The higher premium may be difficult to maintain, and cash surrender values can be low during the policy’s early years. |
The right choice is not simply the policy with the most features. It is the policy that addresses the financial risk and remains affordable. The National Association of Insurance Commissioners, or NAIC, recommends considering how much coverage is needed, how long it is needed, and whether the premium can be maintained.
How Term Life Insurance Works
Term life insurance provides protection for a specific period. Common choices include 10-year, 20-year, and longer level-term policies. A level-term policy generally keeps the premium and death benefit unchanged throughout the initial term.
When the term ends, the policy may expire. Some policies allow renewal without a new medical examination, but the renewal premium will normally be based on the insured person’s older age and can be much higher. A nonrenewable policy requires the person to apply for new coverage.
Term life insurance is often the first option for a household that needs a relatively large death benefit but has limited income. Most of the premium pays for insurance protection rather than cash accumulation, so term coverage generally provides more death benefit for the same monthly budget.
Term Life Insurance Example
Nina is 33 years old, earns $30,000 a year, and has two young children. She estimates that her family would need:
- Five years of replacement income totaling $150,000.
- An additional $95,000 for debts, funeral expenses, childcare, and education.
- A reduction of $20,000 for savings and existing employer coverage.
Her estimated need is $225,000, so she compares 20-year level-term policies with a death benefit of approximately $250,000.
If Nina dies in year 12 while the policy is active, the beneficiary can receive the $250,000 death benefit, subject to the policy terms. If she is alive when the 20-year term ends and does not renew or convert the policy, the coverage ends and there is normally no cash value to withdraw.
This arrangement may fit Nina because her largest need is temporary. In 20 years, her children are likely to be financially independent, and some of her debts may have been paid.
How Whole Life Insurance Works
Whole life insurance is a form of permanent cash-value insurance. It is designed to remain active for life when required premiums are paid. Traditional whole life policies generally provide a stated death benefit, a scheduled premium, and guaranteed cash values described in the policy.
The cash value is separate from the policy’s face amount. It usually grows slowly during the early years because part of the premium pays insurance costs and company expenses. Policy owners may eventually be able to surrender the policy for its cash value or borrow against that value.
A policy loan is not free money. The insurance company charges interest, and any unpaid loan balance is deducted from the death benefit or the cash surrender value. A large loan can also cause a policy to lapse under certain circumstances.
Whole Life Insurance Example
Leon is 59 years old, has no financially dependent children, and wants $20,000 to help his family pay funeral expenses and a small personal debt whenever he dies.
A small traditional whole life policy may fit that permanent need, provided Leon can comfortably afford the premium for the required payment period. Unlike a 10-year or 20-year term policy, the whole life coverage would not expire simply because Leon reached the end of a term.
Suppose Leon later borrows $4,000 against the policy and does not repay it. When he dies, the insurer can deduct the outstanding loan and interest from the death benefit. His family would therefore receive less than the original face amount.
Leon should also ask whether the policy provides full coverage immediately. Some guaranteed-acceptance or final-expense policies use a graded death benefit, which means the full benefit is not available during an initial waiting period.
What the Same Budget Buys
Assume that two applicants each have a fixed life insurance budget of $40 per month.
The applicant buying term insurance will generally be able to purchase a larger death benefit because the policy covers only a defined period and does not build cash value. The applicant buying whole life may receive a much smaller death benefit, but the coverage can last for life and may accumulate cash value.
The exact difference depends on the applicant’s age, health, tobacco use, location, coverage amount, policy design, and insurer. For that reason, sample advertisements should not be treated as personal quotes.
Which Type Is Usually Better for Someone With Limited Income?
For many low-income households, term life insurance is the first product worth comparing. It is particularly useful when children, a spouse, or another family member depends on the insured person’s wages or unpaid caregiving.
Whole life may be reasonable when the need is permanent and relatively modest, such as a carefully calculated final-expense need. However, the higher premium should not prevent the household from paying for housing, food, utilities, emergency savings, health care, or high-interest debt.
A smaller policy that remains active is usually more useful than a larger policy that becomes unaffordable and lapses.
A practical coverage calculation is:
Income replacement + debts + childcare + funeral expenses + education needs, minus savings and existing insurance.
There is no requirement to purchase a standard multiple of income. A person with no dependents, no co-signed debts, and enough savings for final expenses may need little life insurance. A parent with several young children may need considerably more.
Important Warning for SSI and Medicaid Recipients
Cash value can affect certain public-benefit eligibility calculations.
Under Supplemental Security Income rules, when the total face value of life insurance policies owned on one person exceeds $1,500, the accessible cash surrender value may count as a resource. Burial-related and other exclusions may apply. Term life insurance normally has no cash surrender value.
Some Medicaid eligibility categories use asset tests, while others do not. The treatment of cash-value life insurance can depend on the person’s eligibility category and state rules. Before purchasing, surrendering, transferring, or borrowing against a whole life policy, an SSI or asset-tested Medicaid recipient should speak with the appropriate benefits office or a qualified benefits counselor.
Free and Lower-Cost Life Insurance Programs
During this review, no nationwide federal program could be verified that provides an individual life insurance policy solely because an applicant has low income. The federal benefit finder instead directs people to category-specific survivor, disability, military, family, and cash-assistance programs. The options below are either income-targeted programs or coverage connected to military service or federal employment.
1. MassMutual LifeBridge Free Life Insurance Program
MassMutual’s LifeBridge program provides a free $50,000, 10-year term life insurance policy to certain income-eligible parents and legal guardians. MassMutual pays the premiums.
If the insured parent or guardian dies during the 10-year term, the benefit is paid into a trust and used for the eligible children’s educational expenses. Covered expenses can include tuition, school fees, books, campus room and board, trade school, private school, preschool, college, and university expenses.
The benefit is not a general-purpose payment to the family. It is paid through the trust directly for qualifying educational costs, so it is not designed to pay the household’s rent, groceries, funeral bill, or ordinary debts.
As of the review date, applicants must generally meet all of these requirements:
- The applicant must be between 19 and 42 years old.
- The applicant must be a parent or legal guardian of at least one dependent child under age 18.
- The applicant must be a permanent legal resident of the United States.
- The applicant must be employed either full time or part time.
- Total family income must be at least $10,000 but no more than $40,000 per year.
- Only one parent or guardian in the household may apply.
- The applicant must satisfy MassMutual’s health and underwriting requirements.
Official application links:
Read the LifeBridge program overview
Download the LifeBridge eligibility brochure and application form
The eligibility form must be completed and mailed using the instructions in the brochure. Completing the form does not guarantee approval because additional underwriting applies.
2. Veterans Affairs Life Insurance, or VALife
VALife is not based on income, but it can be an important lower-cost whole life option for eligible veterans with service-connected disabilities.
Veterans age 80 or younger can generally qualify if they have a VA service-connected disability rating, including a 0% rating. A limited exception exists for some veterans age 81 or older who applied for disability compensation before turning 81 and later received a qualifying rating.
VALife offers guaranteed-acceptance whole life insurance in $10,000 increments, up to $40,000. No medical examination or proof of good health is required. Premiums are based on the veteran’s age at enrollment and the amount selected, and the premium rate does not increase while the policy remains active.
Applicants should understand the two-year waiting period. The full face amount begins two years after enrollment. If the insured veteran dies during the waiting period, the beneficiary receives the premiums paid plus the applicable interest rather than the full coverage amount. VALife begins accumulating cash value after two years, but it does not offer policy loans.
Official application links:
Review VALife eligibility and benefits
Check eligibility and apply for VALife online
3. Veterans’ Group Life Insurance, or VGLI
VGLI is renewable group term life insurance for eligible veterans and former service members. It is not income-tested.
An eligible veteran may obtain between $10,000 and $500,000 in coverage, based initially on the amount of Servicemembers’ Group Life Insurance, or SGLI, held when leaving military service. An application generally must be submitted within one year and 120 days after separation.
Veterans who apply within 240 days after separation do not have to answer health questions. Applicants who wait beyond that period must provide evidence of good health.
VGLI premiums are based on age and coverage amount and adjust at five-year age brackets. This can make VGLI valuable for a veteran with medical conditions who applies within the no-health-question period, but the applicant should review future age-based premiums before choosing a large benefit.
Official application links:
Review VGLI eligibility and coverage
Review application instructions and apply for VGLI
Active service members normally receive SGLI automatically and can manage beneficiaries or coverage through the SGLI Online Enrollment System. The VA’s official life insurance portal provides links for SGLI, VGLI, family coverage, and other military insurance programs.
Visit the VA life insurance portal
4. Federal Employees’ Group Life Insurance, or FEGLI
FEGLI provides group term life insurance to most eligible federal employees. It is not a low-income benefit, but it may be a cost-effective option for an eligible federal worker.
Most new federal employees are automatically enrolled in Basic coverage unless they waive it. The federal government pays one-third of the Basic premium, and the employee pays two-thirds. Optional insurance is paid entirely by the employee and must normally be elected within 60 days of becoming eligible. FEGLI does not build cash value.
Official enrollment links:
Read the FEGLI enrollment instructions for new federal employees
Download the FEGLI Election Form, SF 2817
The completed election form is submitted to the employee’s federal agency human resources office, not directly to an insurance company.
5. Employer, Union, and Association Group Life Insurance
Some employers pay for a basic amount of group term life insurance or allow workers to purchase additional coverage through payroll deductions. Unions and professional associations may offer similar plans.
A worker should not assume that employer coverage is enough. The benefit may be limited to one year of pay or another modest amount, and the coverage may end or become more expensive when employment ends.
There is no single public application portal for employer-sponsored insurance. The employee should ask the human resources or benefits department:
- What amount is provided at no cost?
- Can additional coverage be purchased?
- Is evidence of good health required?
- Can the policy be converted or continued after leaving the job?
- How much will the coverage cost at older ages?
Related Survivor Benefits That Are Not Life Insurance
Social Security survivor benefits are not a life insurance policy, but they can provide monthly payments to an eligible spouse, former spouse, child, or dependent parent after a worker who paid Social Security taxes dies. These benefits can be especially important to a lower-income family.
Review Social Security survivor benefits and application instructions
Survivor benefits generally cannot be applied for completely online. A survivor can contact Social Security at 1-800-772-1213 or speak with a local Social Security office. Certain eligible spouses or children may also qualify for a one-time $255 lump-sum death payment.
The USAGov benefit finder can also identify possible military, disability, family, cash-assistance, and survivor programs.
Use the official USAGov benefit finder
How to Shop for Private Coverage Safely
When comparing private policies, request quotes for the same death benefit, term length, and policy features. A $250,000 20-year level-term policy should not be compared directly with a $25,000 whole life policy because the products solve different problems.
Ask the insurer or agent to explain:
- Whether the premium is guaranteed and how long the guarantee lasts.
- Whether a term policy can be renewed or converted to permanent coverage.
- Whether a whole life policy has a waiting period or graded death benefit.
- What the guaranteed cash surrender values will be after one, five, ten, and twenty years.
- What interest rate applies to policy loans.
- Which features are guaranteed and which depend on non-guaranteed dividends or assumptions.
- What happens if a payment is late or the policy lapses.
A policy that requires little or no medical information may be convenient, but the NAIC notes that such policies often cost more and provide less coverage than medically underwritten policies. Always answer application questions honestly. Materially false information can lead to reduced or canceled coverage.
Do not cancel an existing policy until the new policy has been approved, delivered, reviewed, and placed in force. Changes in health can affect the ability to replace lost coverage.
Before submitting money or personal information, confirm that the company and agent are licensed in your state. State insurance departments provide free consumer assistance, license information, and complaint services.
Find your state insurance department through the NAIC
The Bottom Line
For a low-income parent or wage earner who needs substantial protection for the next 10 to 30 years, term life insurance is usually the first option to compare. It generally provides the most death benefit for a limited premium.
Whole life insurance may be appropriate when the need will not disappear, such as a modest final-expense need or support for a lifelong dependent. The premium must be sustainable, and anyone receiving SSI or asset-tested assistance should check how the cash value could affect eligibility.
Income alone does not provide access to a broad federal life insurance subsidy. Applicants should check the LifeBridge program if they meet its exact income, age, employment, family, residency, and health requirements. Veterans, service members, and federal employees should also review the official programs tied to their status.
The best policy is not necessarily the one with the largest advertised benefit or the most features. It is the one that covers the actual financial need, fits the monthly budget, and is likely to remain active when the family needs it.