Term vs Permanent Life Insurance

Term insurance is highly recommended by many financial advisors. On many talk radio shows, the host will praise its virtues. In many financial periodicals, experts will argue on its behalf. Indeed, when many people speak with their own accountant or financial planner, term is often the life insurance product of choice. In this article, we will revisit some of the pros and cons of this product vs. permanent insurance.

What is the priority?

Let’s start be stressing the following:

We believe the number one priority when buying life insurance is to have sufficient survivor benefit. This means, for example, that if your family or business needs a million dollars of coverage, and all you can afford is term insurance, then you buy it. The key reason for this is that nobody can plan the date of a claim. Everyone would like to think they’ll live to a ripe old age, and indeed we hope we all do. However, the fact remains that a claim could unfortunately be made tomorrow. One really has no control over the drunk drivers, work accidents, plane crashes, aneurysms, and the many other factors beyond our control.

Therefore, for someone to settle for less life insurance in return for a long term premium guarantee or cash accumulation, could deprive the beneficiary of money needed. We would never want to be in the position of saying to the beneficiary: “We’re sorry Mrs. Jones, you only have half the money you really need, but had your husband lived, you would have had a longer guarantee.”

What is your time-frame for coverage?

Having said that, let’s discuss further why term insurance might be merited. Clearly, if a need is for a specific time period- such as to cover a bank loan, mortgage, or asset transfer strategy – term insurance could be used. However, if the time period for the coverage cannot be specifically planned, permanent insurance could be more appropriate. We often tell our clients that if there is at least a fifty percent chance they could need life insurance past an expected time period, they should consider a permanent product.

Features of permanent insurance

Now let me review what we mean by permanent life insurance. One of my favorites is universal life insurance. This product is very attractive because it is built with both flexibility and also guarantees. For example, it could be used to provide lifelong coverage on a guaranteed basis: both the death benefit and the premium could be guaranteed through age 100, and even beyond. Cash accumulation would be negligible; so in essence you have “permanent term insurance.”

Universal life insurance can also be structured to guarantee a return of all premiums paid after a certain time period; and, too, it can fix payments for a set number of years while still providing coverage on an ongoing basis. At the same time, both universal life insurance, and also its bigger brother whole life insurance, can be designed to accumulate significant cash values with all the attractive tax advantages life insurance has traditionally offered.

The underwriting factor

One final note: many people who buy life insurance are faced with more limited options due to their current health or medical history. In these cases, more attractive pricing may be available with permanent insurance, because of underwriting concessions that could be offered by the carrier.