Which is Better — Term Life Insurance or Permanent Life Insurance?
For as long as I have been in the life insurance business (starting in 1984) there has been a debate about which type of life insurance is the better buy. Since there is a dramatic difference in premium between the two types of insurance the argument for term life insurance goes: “buy term and invest the difference.” The proponents of the “buy term” philosophy like to use the historical growth of the S&P or the Dow to illustrate the savings that could have been generated if not used to buy permanent life insurance. The real question is this: is that always the case and more importantly, does the amount in your retirement accounts really matter when it comes to which type of life insurance you should own?
Before I answer the question of which is better, we must first define the different types of life insurance.
Term Life Insurance — This is life insurance that is purchased for a specified amount of time. Typically, a term life insurance policy is purchased for 10, 20 or even 30 years. Essentially you are buying pure insurance with a premium that is designed to keep your policy in force for the term duration.
Whole Life Insurance — As a general rule when people think of “permanent life insurance” it is whole life that they have in mind. In fact, whole life insurance was the original “permanent” life insurance. The premium is significantly higher than term life insurance because it is designed to keep your policy in force regardless of age. There are several variations of whole life with some being more expensive than others. Whole life insurance is essentially decreasing term insurance combined with increasing cash value.
Universal Life Insurance — First marketed in 1979 by the Life Insurance Company of California (Later E.F. Hutton Life) this product took the best of the “buy term” philosophy and combined it with a “whole life” design but with lower premiums and more premium flexibility and created Universal Life Insurance. While there are arguments both for and against universal life insurance, it is sold as a “permanent life insurance” policy. Today there are numerous variations of universal life. Like whole life, universal life insurance is a combination of term life insurance (true insurance costs) and increasing cash values.
It is important to note that permanent life insurance, whether whole life or universal life can be purchased for reasons other than the need for life insurance protection such as tax-free retirement income, to eliminate debt and more. This article is focused solely on buying life insurance to provide security for your spouse and/or children.
Back to the Original Question
In my humble opinion I believe that when it comes to life insurance coverage the smart choice is a combination of permanent and term life insurance. When you have a spouse / partner and your standard of living is dependent on both incomes the only to purchase enough life insurance is to use term life insurance. To understand this choice, consider a couple with each person making $50,000 annually for a total income of $100,000. They have a $250,000 home with a mortgage of $200,000 at 3.5% interest. They have a monthly mortgage payment of $898 plus homeowner’s dues of $250 and taxes of $150 for a total monthly payment of $1298. In addition, they have two car payments of $400 each for another $800. Then there is food, utilities, and other expenses. While this is not a problem so long as both people are working and earning $4166 monthly, should one of them die (cancer, car accident etc) the surviving partner / spouse would have a serious financial problem. In this case a minimum of $250,000 in life insurance should be purchased on each partner. Assuming that each person is 35 years old a 25-year term life insurance policy would cost $18 monthly for a male and $15 for a female. The same amount of coverage using whole life would cost $179 a month just for the male in our example. Obviously $18 is far more affordable!
The example above also explains why so many financial advisors talk about buying term life insurance and investing the difference. Our male example would save $161 monthly which could then be invested in mutual funds, stocks or even a low interest certificate if deposit. Over time this can add up to a sizeable savings account.
My recommendation to this young couple would be to purchase some amount of permanent life insurance in addition to the term life insurance. I am partial to a Guaranteed Universal Life Insurance policy. One Guaranteed Universal Life Insurance policy with the death benefit guaranteed until age 120 and a death benefit of $100,000 would have a premium of $48 monthly with one of the insurance companies that I represent.
I understand that many financial advisors would never recommend any type of permanent life insurance. And in a perfect world the couple in my example would have 30 years without any interruption of their ability to put aside and invest their money. But the world we live in is not perfect, and insurance protects against the unforeseen. Right now, as I write this article we are in the midst of the Covid worldwide shut down. Unemployment has spiked and we have no idea how many of those people who are laid off will ultimately return to work after the crisis ends. We also do not know how much of their savings will be depleted as they pay their bills in the absence of an income. To complicate matters it is very likely that their investments have seen a 20% or more drop in value. Your permanent life insurance. A lot of people remember the 2008 recession where the stock market plummeted and with it, many people’s investments. And these are just a couple of the many unexpected things that can happen.
Life insurance after retirement guarantees that if one spouse dies, the accompanying loss of income will not be devastating to the surviving spouse. One of the most important considerations is that as you age the cost of buying a new permanent life insurance policy will increase significantly, often making the purchase unaffordable when you need it the most. A second and very important consideration is the possibility of a change in health. I am going to use myself as an example of this consideration. In 1989 I was extraordinarily health, running regularly and working out. On one fateful day I awoke in excruciating pain. It turned out that I was having the first of several kidney stones. As they admitted me to the hospital blood work was done. That blood work determined that I had a chronic liver disease and at the age of 36 I was now uninsurable. The life insurance that I owned at that time was the only affordable life insurance that I was ever going to buy. If I had only purchased 20-year term life insurance I would now have zero life insurance, and should I predecease my wife of 40+ years she would lose half of our combined social security benefit. But because I had permanent life insurance in addition to my term life insurance, she will have a replacement for the lost income.
If you have any questions please contact me at email@example.com or call (336) 525–6357