Deciding Between Permanent or Term Life Insurance

The difference between term life insurance and permanent life insurance is similar to the difference between renting or owning a home.  With term life insurance you are purchasing relatively affordable coverage protection for a predetermined number of years and there is no inherent cash value to you if you survive past your coverage.  Permanent life insurance, on the other hand, costs more, can build cash value over time, and is literally ‘with you’ for your entire lifetime.  Let’s break these differences down a bit further.

Term Life Policies are Affordable and Reliably Simple

Term life insurance is inexpensive insurance that provides a benefit payout to your heirs if you were to die during that specified term. Most companies now offer 10, 15, 20, 25, and 30-year term duration options. The more time you purchase, the higher the premium cost. These term durations come with a fixed premium to you for the duration of the term and depending on your age, health, and type of policy, your monthly premiums could be lower than your cell phone bill.

Coverage For Life: Permanent Life Policies

Permanent life insurance comes in many different forms, but mostly derivatives of two types of insurance: whole life and universal life. These get further subdivided and we’ll go into a few of them in a moment, but, going back to our comparison of permanent insurance to homeownership, permanent insurance comes at a greater cost because it stays with you for your entire life as long as the required premiums are paid in full and on time.

As we dive further into the different types of insurance, it’s helpful to keep in mind why insurance companies price things the way they do.  It all boils down to the risk to the insurance company. The reality is that term insurance is cheap because 99% of term policies don’t pay out as people outlive their coverage, thus the risk to the insurance company is very low. That’s not to say that you shouldn’t get one though. Having an inexpensive term policy in place is still providing the protection that most families need during a period of their lives when the loss of an income is most destructive. 

When speaking of permanent insurance, the one thing we know for sure.  Nobody lives forever.  That means that 100% of these policies will pay out as long as they’re still active increasing the risk to the insurance company that they will have to pay eventually.

Term is Term, Permanent is…Well a Lot of Things

Term insurance is term insurance. It’s straightforward. There’s not much to discuss here. Permanent life insurance has a more robust offering. 

Whole life is a permanent insurance policy where most aspects, if not all, are guaranteed in the contract. There’s a guaranteed premium, a guaranteed cash value, and a guaranteed death benefit. Whole life comes in two different forms:

Participating whole life

• Offered by mutual companies i.e. New York Life, Mass Mutual Northwestern Mutual, etc. These companies share their profits by paying dividends, above what is guaranteed, which increases the cash value available to you when the company does well.

Non-participating whole life      

• Offered by stock companies i.e. Transamerica, Protective Life etc. These tend to be less expensive, but do not pay dividends.

Universal Life is the other type of permanent insurance. It also comes in various forms. These policies have many moving parts and, in some instances, have the ability to accumulate great cash value sums if designed correctly. The riskier the policy is to you, the client, the greater the cash value accumulation potential but this also increases the chance of either losses or perhaps having your policy lapse. Here are some different types of universal life insurance ranked from least to greatest risk:

1.     Guaranteed Universal Life (GUL) – Often referred to as permanent term insurance. It’s best to think of these as not having any cash accumulation. Pay your premium on time and in full, and the death benefit is guaranteed to whatever the contract states (usually age 100 or 120). This is the least risky and is frequently used in estate planning cases.
2.     Index Universal Life (IUL) – If you’ve ever heard the term “zero is your hero” this is what is being spoken of. These policies utilize different market indices (S&P 500 index for example) as a crediting method for your cash value. If the index goes up 10%…they credit your policy 10%. Every IUL comes with a cap and a floor. The floor is typically 0, so even if the index loses one year, you don’t lose. The caps vary by company and product but for our purposes, we’ll call it 10%, so if the market increases 12% that year, the crediting is capped at 10%. These are very efficient vehicles for supplemental retirement income planning. It is important to note that your money is not being invested in the market, it is only linked to how the market performs.
3.     Variable Universal Life (VUL) – VUL is a life insurance product offered through registered, licensed financial advisors where, instead of linking the crediting to an index, they are directly invested in mutual funds. These policies have the ability to grow as much as the mutual fund you and your financial advisor choose to invest in them grows, but there is no floor, and without constant attention, may lose money.

Your Need for the Insurance Should Dictate Your Policy Decision

Everyone’s different. I mentioned above that many agents compare term and permanent insurance to renting and owning a home. This is done not just to help people understand the difference, but also as a sales tactic to sell more permanent insurance. The Dave Ramsey’s and Suze Orman’s of the world would tell you to only buy term insurance and invest the difference, but that blanket statement doesn’t work either. The real answer is, you need whatever you need. If you know you only need 30 years of term coverage to cover a 30-year mortgage on a house, then term life is probably the right choice. If you’re looking for a tax-advantaged, supplemental retirement savings vehicle that is treated similarly to a Roth IRA, a permanent policy is what we need to look at. We’re here to help you navigate these options and our goal is to not bust anyone’s budget. It’s better to have some insurance in place that you can afford than to have nothing at all.