There are many diﬀerent types of life insurance, but they can typically be broken down into two main categories: term or permanent life insurance. Whole life insurance is a very common form of permanent life insurance. Let’s examine term vs. whole life insurance to help you better decide which one might be the right fit for your needs.
The fundamental diﬀerence between term and whole life insurance is that term coverage is only temporary, while whole life insurance can provide permanent protection.
A term policy usually lasts somewhere between 10 and 30 years (although shorter and longer terms may be available). If the insured individual dies during this time, a payout is made to their beneficiaries. If the individual lives past the expiration date of the policy, the coverage lapses.
Meanwhile, a permanent life insurance policy is intended to remain in place until the insured individual dies, as long as all required premiums are paid on time. Another key diﬀerence between these types of policies is that whole life insurance generally oﬀers additional features such as a cash value that may be withdrawn or borrowed against. Term life insurance does not include any such features.
Now that you understand the basic diﬀerences between term and whole life insurance, how do you decide which one to choose? Each type of policy is designed with diﬀerent needs in mind, and each has its potential benefits.
Term life insurance is generally more aﬀordable for most people than permanent life insurance. Rates are typically lower because many people outlive their coverage length. Outliving your policy (and having your beneficiaries not receive a payout) is a potential disadvantage of term life insurance, though it often means that you’re not paying for coverage you don’t need.
Because term life insurance allows you to choose a coverage length, you can customize your plan to fit your needs. Remember, you may not need life insurance forever.
For example, let’s imagine that you’re a 30-year-old married person with two young children and a mortgage. It might be wise to consider purchasing life insurance because if you were to die unexpectedly, your spouse may have trouble aﬀording the mortgage on their own, there may not be enough money for your children to aﬀord college and the surviving family’s way of life might not be the same without your income to support them.
The payout from a life insurance policy can help pay oﬀ the mortgage, help send children to college and help beneficiaries’ lives continue just as they did when you were alive, at least from a financial perspective.
When you’re 60 years old, your mortgage might be paid oﬀ, and your kids may be into adulthood and financially independent. By this time, your retirement funds and other investments may have had time to mature. And at this point, you may not need the same amount of life insurance. If you purchased a 30-year term policy, the coverage — along with your payments — would simply end in most cases. But if you purchased a whole life policy, you may find yourself holding a policy — and the payments — that you might no longer need.
While you may not need life insurance forever, it can also be diﬀicult to predict your future financial obligations. Let’s use the same example as above, with a 30-year-old married homeowner who has two children.
What if, at age 45, you were forced to move for one reason or another and had to start all over with a fresh 30-year mortgage? That can stretch the age at which you would pay oﬀ your home to age 75.
What if your 401(k) or other investments don’t perform as expected and you close in on retirement age with less money than anticipated?
What if one of your children needs financial assistance into adulthood due to a disability or financial hardship?
The permanent coverage oﬀered by permanent life insurance (such as whole life policies) can help provide some stability in an unstable world. The policy’s cash value may be accessed (assuming the cash value accumulation is available) if you need some money in a pinch. And the cash value accumulation features can add some diversity to your financial portfolio and provide some additional options for financial planning.
You may also opt for whole life insurance if your heirs will be forced to pay taxes on your estate. Whole life insurance can also be used to leave a donation to a charity or organization in your name. You might even consider permanent coverage just to help make sure the cost of your funeral does not become a financial burden for your loved ones.
When deciding between term vs. whole life insurance, there is no right or wrong answer. Only the answer that’s right for you.
The decision between term and permanent life insurance is a big one, but it’s one you may not have to make at all. There are two additional coverage options you can consider.
This is a type of term life policy that includes the option to convert into permanent life insurance at some point in the future. This way, you can wait to decide whether term or permanent life insurance is best for you. A convertible policy typically won’t accumulate a cash value while it is a term policy.
Some individuals may consider buying both term and permanent life insurance policies. If you anticipate needing more life insurance coverage in the near future (possibly while your children are young or you haven’t made many mortgage payments), but you’ll potentially need less coverage later on, this can be a viable option for you. You can use a term policy for financial protection while leveraging a permanent life insurance policy for the cash value accumulation opportunity.
AIG Life Insurers are here to help you determine the type of life insurance that’s right for your needs. We oﬀer a suite of both term and permanent life insurance products tailored to people of varying needs. An AIG-appointed life insurance agent can help you determine if a term or a permanent life insurance policy (such as a whole life policy) may be best for your current situation along with your future goals.
Call us today at 866-971-4232.
Agency services provided by AIG Direct Insurance Services, Inc. ("AIG Direct"), CA license # 0B57619 and AR license # 0100105378, a subsidiary of American General Life Insurance Company ("AGL"), Houston, TX and an affiliate of The United States Life Insurance Company in the City of New York ("US Life"), New York, NY, all members of American International Group ("AIG").
Policies issued by: American General Life Insurance Company (AGL), Policy Form Numbers ICC16-16901, 16901, ICC16-16900 and 16900 except in New York, where issued by The United States Life Insurance Company in the City of New York (US Life), Policy Form Numbers 16901N and 16900N. Issuing companies AGL and US Life are responsible for financial obligations of insurance products and are members of American International Group, Inc. (AIG). Products may not be available in all states and product features including rates may vary by state. All guarantees and benefits of the insurance policy are backed by the claims-paying ability of the issuing insurance company. They are not backed by the broker/dealer and/or insurance agency selling the policy, nor by any of their affiliates, and none of them makes any representations or guarantees regarding the claims-paying ability of the issuing insurance company. ©2018. All rights reserved.
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