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Term life insurance: What is it?

Term life insurance is designed to protect an individual for a predetermined amount of time, usually between ten and thirty years. It functions similarly to renting a home: you pay premiums for the term, and your beneficiaries get paid a death benefit if you pass away during that time. Because this kind of insurance doesn’t normally have a cash value component, it is typically less expensive than whole life insurance. For covering some financial responsibilities, like a mortgage or your children’s school costs, term life insurance is ideal.

Main benefits of term life insurance:

  • Affordability: Cheaper rates than whole life insurance. 
  • Simplicity: Uncomplicated coverage that doesn’t build cash. 
  • Fixed term: The duration of coverage is predetermined; it can be extended in some cases or let to expire. 
  • Renewal options: Certain plans permit a conversion to whole life insurance without the need for a new medical examination.
Family having fun.

What does whole life permanent coverage include?

Whole life insurance, a type of permanent life insurance, offers comprehensive coverage for the insured’s entire life, provided that premiums are paid on time. Unlike term life insurance, which covers a specific period, whole life insurance ensures lifelong protection. It also includes a savings component, known as cash value, which grows over time and can be accessed through loans or withdrawals. Here are the main characteristics of whole life insurance:

  • Lifelong coverage: Permanent coverage provided premiums are paid. 
  • Cash value accumulation: Provides a savings component by gradually building cash value. 
  • Fixed premiums: Throughout the duration of the policy, premiums stay the same. 
  • Dividends: Certain plans have the potential to provide dividends, which can be applied to lower premiums or boost cash value.
Family walking down the street with their child and stroller in hand.

Additional benefits of term life coverage

1. Flexibility for young families: Young families that require inexpensive coverage to guard against the loss of income during pivotal years might especially benefit from term life insurance. 

2. Supplementary coverage: It can cover certain needs, such as for debt repayment or supporting dependents until they achieve financial independence, in addition to the primary coverage. 

3. Conversion to permanent insurance: A lot of term insurance policies come with a conversion option that lets policyholders transfer to a whole life policy without having to get a new medical exam, so they can continue to be insured even if their health changes.

Family having fun.

Additional benefits of whole life insurance

1. Estate planning: Ensuring that beneficiaries receive a death benefit to meet estate taxes and other last expenses, whole life insurance is a great instrument for estate planning. 

2. Wealth transfer: It makes wealth transfer effective and gives heirs a death benefit that is guaranteed. 

3. Retirement income: Loans against or withdrawals from the insurance may be made from the cash value component. 

4. Tax advantages: Policy loans are usually tax-free, and the cash value increases tax-deferred, giving you more financial planning flexibility.

Examples and scenarios of term and whole life insurance

Scenario 1: A young family covered by term life insurance.

With two small children, John and Emily are in their early thirties. They recently bought a house and now have a mortgage to pay off. John is the family’s main provider, and Emily looks after the children while working part-time. They choose to buy both John and Emily a $500,000 death benefit 20-year term life insurance policy. This policy is reasonably priced and guarantees the remaining spouse and the children will be able to pay the mortgage and living expenses in the event of John’s or Emily’s death.

Scenario 2: A high net-worth individual with whole life insurance.

Sandra is a forty-year-old entrepreneur, with significant assets and earning a good salary. She wants to make sure her heirs are provided for after she passes away and that her inheritance is handled properly. Sandra chooses a $2 million death benefit whole life insurance policy. This offers coverage for life as well as an increasing monetary value over time. Her children can cover estate taxes and avoid inheritance taxes according to the policy.

A woman driving her car with her mother next to her.

Pros and cons of term life insurance

Pros:

  • Affordability: It is accessible because of lower premiums. 
  • Simplicity: Simple to comprehend and manage. 
  • Flexibility: Perfect for meeting temporary needs. 
  • Renewable: The ability to convert to whole life insurance or to renew. 

Cons:

  • Limited coverage: Expires after the term ends. 
  • No cash value: Complete coverage devoid of any savings element. 
  • Higher renewal costs: When a premium is renewed, the cost goes up.
Father holding his daughter in his arms, mom in the background smiling.

Pros and cons of whole life insurance

Pros:

  • Lifetime coverage: Permanent protection. 
  • Cash value: Gains value through time. 
  • Fixed premiums: Fixed expenses. 
  • Dividends: Possibility of further benefits. 

Cons:

  • Higher premiums: Term life insurance is typically less costly than this. 
  • Complexity: The savings component makes it more complex. 
  • Surrender charges: Penalties may apply for early withdrawal.
Happy family having fun time at home.

Customization and policy riders

To tailor coverage to your needs, policy riders are extra features that can be added to life insurance contracts.

Common Term Life Insurance Riders:

  1. Conversion rider: Permits conversion to Whole Life Insurance without the need for a new physical examination. 
  2. Waiver of premium: Covers premiums if the policyholder is rendered incapacitated. 
  3. Accelerated death benefit: Pays out a percentage of the death benefit if a terminal illness is identified.

Common Whole Life Insurance Riders:

  1. Guaranteed insurability: Permits the acquisition of extra coverage without requiring a physical examination. 
  2. Long-term care: Covers costs associated with long-term care. 
  3. Accidental death benefit: This enhances the death benefit in the event that an accident causes a death.
Woman calculating life insurance tax implications

Tax Implications of whole and term life insurance

Comprehending the tax consequences associated with both whole life and term insurance will help with your financial planning.

Term Life Insurance Tax Benefits:

  • Death benefit: Usually exempt from federal income tax. 
  • Premiums: Not exempt from taxes.

Whole Life Insurance Tax Benefits:

  • Death benefit: Usually exempt from federal income tax. 
  • Cash value growth: The growth in cash value is tax-deferred. 
  • Loans and Withdrawals Under Policy: Although withdrawals that exceed premium payments may be taxable, loans are typically tax-free.

Guidance selecting the best life insurance policy

It’s important to carefully evaluate your budget, coverage requirements, and financial goals before choosing a life insurance policy. Here are some things to think about:

1. Age and health: While older people may benefit from whole life insurance’s lifetime coverage, younger, healthier people may find term life insurance cheaper. In both cases, premiums tend to be lower when policies are purchased at a younger age. 

2. Financial objectives: Whole life insurance is the best option for long-term financial planning, such as estate planning, retirement income or final expenses, while term life insurance is appropriate for short-term financial obligations like a mortgage. Our AAA life insurance agents can guide you through selecting the policy that meets your financial goals.

3. Budget: Because term life insurance has lower premiums, it is typically more affordable. Whole life insurance, on the other hand, can be more expensive but provides the benefit of cash value accumulation. 

4. Dependents: Take into account your dependents’ financial requirements. For people who will depend on your salary for a long time, whole life insurance can offer lifetime security.

Final Thoughts

Selecting between whole life and term insurance is a big choice that depends on your demands for coverage, ambitions, and particular financial circumstances. Term life insurance is a great option for young families, couples who need a lot of coverage and are on a budget and people with unique financial obligations because it provides an affordable answer for short-term needs. 

Whole life insurance offers long-term financial security and benefits that go beyond basic life coverage because of its permanent coverage and cash value component. You can choose the policy that best fits your financial plan and provides security for your loved ones by carefully

Frequently Asked Questions

It is dependent upon your financial objectives and unique situation. While whole life gives lifetime coverage and cash value rewards, term life is more cost-effective and best suited for short-term needs.

A lot of term life policies allow you to do so without having to get a new medical exam.

No death benefit is paid, and the coverage ends. If it’s possible, with your policy, you can convert it to whole life insurance, buy a new policy, or renew your current one.

Growth of the cash value is tax-deferred. If you take out more money than you paid in premiums, you might have to pay income tax.

Yes, combining the two can meet various budgetary requirements. A whole life policy, on the other hand, offers lifetime protection and cash value buildup, whereas a term policy can only cover transient obligations.

Life insurance underwritten by our affiliate AAA Life Insurance Company, Livonia, Mi. AAA Life is licensed in all states except NY. AAA Life CA Certificate of Authority #07861. Products and their features may not be available in all states. ALAN-XXXXX-724-XX©2024 The Auto Club Group. All Rights Reserved.

*Benefits may be reduced by any loans and unpaid interest on the policy. Whole Life Policy Form Series: ICC18-5601& 5601 (IN OR: ICC18-5601), Guaranteed Issue Graded Benefit Whole Life Policy Form Series: ICC16-6301 & GWL6301 (IN OR: ICC16-6301)

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