Most people find us on the web and already know what they want. You might have heard that it’s best to buy a 20-year or 30-year term policy and now you are checking out rates and carrier ratings. Other people want to do some homework and check out all their options. You might have some questions and want to know is term or permanent life insurance better.
We understand that purchasing life insurance is a long-term commitment. It makes sense to take all the time necessary to select the right type of plan and the right amount of coverage. You might have looked to some experts for their opinions on life insurance and found conflicting opinions. We want to help bring some clarity to the “term versus permanent” debate.
Most people think all permanent insurance is whole life insurance. There are actually several types of insurance that fall under the “permanent” life insurance umbrella. There is whole life insurance and various types of universal life insurance. We compare the types of permanent insurance here.
Financial Gurus Disagree
There is an abundance of information on the Internet pertaining to life insurance and what is the best type of policy. It can be challenging to sift through the marketing hype, especially the stuff from life insurance agents or industry insiders.
Many industry types will tout the benefits of permanent life insurance and say things like, “term insurance is like renting a house and permanent insurance is like owning a house.”
Well, if you put it that way, I think I’d rather own than rent….but, that is an overly simplistic way to look at life insurance.
There are many financial experts who say that permanent life insurance is always a bad deal. They go on to say that you should never mix your life insurance with your investments. They falsely equate permanent life insurance with “cash value” life insurance. The reality is that not all permanent insurance has an investment component. There is a product called guaranteed universal life (GUL) that is like a term policy that never expires. Others refer to it as Term for Life or Term to age 100.
So, now you understand the difference between GUL and cash-value life insurance. Is cash value life insurance always a bad deal? Some financial gurus would have you believe there is never a good reason to buy cash-value life insurance. Well, I disagree with using the word “never”; however, there is a lot of truth to much of what the “term only” folks say. Cash value life insurance is sold way too often when a term policy or a combination of mostly term and some GUL would more than suffice.
My Experience As A Cash Value Life Insurance Agent
When I first started in the business in 2000 (16 years ago) with a very large company (mostly known for their auto and homeowners insurance), I was trained as a “Life Specialist”.
I was instructed to memorize a sales pitch called the Personal Security Builder (PSB as the called it). Basically, it was a pitch to sell a cash value universal life policy as both a means of protection and retirement/college savings. I was exhorted to never talk to people about the mechanics of the product – universal life insurance – but to just help them think of this strategy as their personal security builder. “Sell the sizzle not the steak” – that was the approach.
Lots of people felt uncomfortable with the high cost and objected during my assumptive close. If their objections couldn’t be overcome, then I was told to “settle” by selling a term policy. I might not earn the big commission, but at least it was better than nothing. Sadly, that was the mentality. I sold many policies during this 8 month stint, but I didn’t feel great about myself.
After this 8 month stint, I worked for a large and highly respected financial services company. During my 2+ years at this company, I was encouraged to sell cash value life insurance to solve both insurance and investment needs. Not much changed, although I learned a lot about insurance and financial planning.
Time to Move On…
As I learned more about insurance and the financial services industry, I realized it was time to move on. I was influenced by talk show hosts on the radio, such as Dave Ramsey and Clark Howard. I became more of a “term life only” guy and decided it was easier to side with the financial gurus and focus only on term insurance.
As you will see, my mind changed as I developed as an advisor. My opinions have been shaped by extensive reading, speaking with financial advisors, and experience working with clients.
The funny thing is…many people actually benefited from this type of policy, even if it was improperly sold. Looking at the numbers, they could have done better with the “buy term and invest the difference” approach. Yes, there are other financial instruments that yield better returns. However, cash value insurance can be considered a type of forced savings plan, where people continue to sock away money into an account that grows on a tax-deferred basis. It might not be the best way to save money, but it has helped many people save, rather than spend disposable income on things that matter very little in the long run. So, that’s the bright side.
The Most Important Use Of Life Insurance
There are many people who really need to protect their spouse and children by replacing their income in the event of a premature death. This is by far, the most important use of life insurance. Unfortunately, many agents appeal to the “living benefits” and “personal security” aspect of cash-value life insurance. This usually occurs to the neglect of the greater need: protecting loved ones against financial hardship.
So, it’s the mindset described above that leads many to conclude the cash-value life insurance is somewhat of a scam. The truth is that there are thousands of agents trying to sell a product that earns them a higher commission. That becomes a priority as they are pressured to meet sales goals and make money.
However, this doesn’t mean that all cash value or permanent life insurance is bad, and that term life is always the better choice.
Is Term or Permanent Life Insurance Better? NO … let me explain!
The question is based on the false premise that one product is superior to the other. It’s like asking whether owning or renting a house is better. Without knowing someone’s situation, you can’t give advice. There are many situations where renting is preferable to owning a house.
The question, “is term or permanent life insurance better?” is usually understood as an either/or proposition when it comes to selecting a policy. The truth is that, most of the time, term life insurance is the best choice. However, there are times when permanent insurance makes more sense.
I spent my first four years in the industry selling a lot of permanent, cash value life insurance. After my short stint as a Life Specialist, I worked for one of the largest, most respected financial services companies. I was trained and certified as a financial advisor. I became a Registered Investment Advisor (RIA) and became a real student of the life insurance and financial services industry. Although I sold mutual funds and annuities, I also sold a lot of life insurance.
During my last year at Mass Mutual, I felt pressured to sell a lot of variable universal life insurance (VUL) and whole life insurance. Don’t get me wrong, there were several good, integrous advisors with whom I worked. I just had a manager focused mainly on commissions.
After I left Mass Mutual in 2004 to become independent, my thoughts towards cash value policies were definitely more negative.
Change of Tune Regarding Cash Value Policies
My attitude towards permanent life insurance, including cash-value policies, changed over the past 12 years as I met numerous people who wish they didn’t buy term. I have had countless calls from people in their 50s and 60s who want and need life insurance…and regretted buying all term insurance.
Another influence came from several financial advisors I met. A couple of these advisors are financial geniuses. One of them is a CFP, CPA and very sharp. We have worked together on a few complicated cases. My colleague spent hours pouring over all the numbers and illustrations and showed me how some cash value policies can be a part of the financial solution. I emphasize the word “part” because good advisors diversify and use a variety of tools.
I met another fee-only advisor who found me online. He was looking for a trustworthy independent agent to whom he could refer some clients. The advisor dropped his insurance license years ago so he would not have any bias in his recommendations. He didn’t want to recommend products that would earn him a commission.
However, this fee-only financial advisor would occasionally recommend various types of permanent, cash value life insurance, including whole life, indexed-universal life and guaranteed universal life. This cemented my conclusion that there is a place for cash-value life insurance and it can make sense some times for some people.
Is Term or Permanent Life Insurance Better? My Conclusion
As I mentioned above, it’s not “one size fits all” with life insurance. I have learned that in many cases, then answer isn’t either/or, but both. I write about Laddering Life Insurance in article here. Basically, it can make a lot of sense to put most of your life insurance in a term policy (or two) and also have one permanent policy. The split could be 75%/25% or whatever works best for your situation.
Some policies have a “return of premium” option that allows you to receive all your premiums returned during certain points of your permanent policy. Let’s say your investments perform better than expected and you feel permanent life insurance is no longer needed. Well, you can surrender your policy and receive back all premiums paid. Sure, there is opportunity cost with the money you could have invested, but it’s better than the other options: surrendering the policy/losing all premiums paid or continuing to pay for a policy that isn’t really needed).
Wouldn’t the scenario above be better than the opposite? Finding out at age 55 or 65 that your retirement savings is much less than you need and you can’t buy more life insurance due to poor health.
Final Words
I often say…It’s not always about crunching numbers and doing a needs-analysis. Oftentimes, life insurance isn’t about the numbers. Many people simply want to ensure their loves ones are protected against financial hardship. Purchasing a permanent policy can provide peace of mind, knowing loved ones are cared for regardless of whatever unexpected setbacks occur in life. It’s an option that sometimes can make sense.
We want to make sure you understand all your options and help you make the best decision for your situation.
Please complete the quote request form on this page or call us directly for a free consultation.
