Choosing Life Insurance: Term or Permanent?

by Julie Rains on 21 August 2007 49 comments
Photo: Shmooved

What’s better: buying life insurance at a low price that lasts for a certain term (typically, the income-generating part of the insured’s life) or purchasing a permanent policy for a substantially greater amount that lasts forever (from now until the insured dies or cashes in the policy)?

Please note that although there are many variants of permanent or cash value policies (for example, whole life, universal life, and variable life products), I am going to focus my discussion on term life vs. whole life.

Here is the basic argument:

Term Life Insurance
Pro: Inexpensive way to get insurance
Con: Lasts for a limited time (for example, 10 years or 30 years)

Whole Life Insurance 
Pro: Is permanent (provides lifetime coverage)
Con: Very expensive
Nuance: Bundles insurance coverage with an investment product

What is the difference in cost between term life and whole life insurance?

It depends. But I’ve done some investigating to give you a rough idea of the price differential. State Farm gives you a peek at whole life rates and its term life rates without getting an agent involved. There are many sites that offer term life quotes and I’ve used QuickQuote.com to get a second term life quote. Price quotes are offered for site users who provide information on state of residence, age, gender, and tobacco habits. Actual prices, which may vary depending on your health status and insurance company's underwriting guidelines, should be obtained from an insurance agent.

To give you an illustration of the price differences, I’ve made some assumptions about a potential insured. She is a 30-year-old, non-tobacco-using female resident of Delaware who wants $500,000 in life insurance coverage for 30 years. Here are the annual rates based on quotes gathered on August 21, 2007:

State Farm Whole-Life Insurance: $5060.00
State Farm Select Term 30: $820.00
AIG Select-A-Term 30 (via QuickQuote): $360.00

If you purchased term life insurance and your investments earned 5% or 10% per year, you would have no insurance coverage but the following investment value at the end of your 30-year term:

State Farm Select Term 30 @ 5%: $281,700.71
State Farm Select Term 30 @ 10%: $697,454.66
AIG Select-A-Term 30 @ 5%:$312,262.58
AIG Select-A-Term 30 @10%: $712,121.91

What you have in 30 years with a whole life policy is $500,000 insurance coverage and an investment value that depends on your insurance policy or contract.

Please note that you (or your insured) will need to die for you to collect the insurance benefit but the investment amount if you bought term is all yours.

The argument in favor of term life, then, is that you can purchase affordable insurance and make investments that will deliver a return that may be comparable (often higher) to the value of the death benefit and you can have access to these funds while (hopefully) the insured is alive to enjoy spending the money.

The case for whole life is that, despite your good intentions, you wouldn’t really end up saving, investing, and earning a good return so that buying a policy that combines insurance with a savings or investment component protects you from lack of discipline. 

I would love to hear that insurance agents, some of whom have financial planning designations, give consumers the pros and cons of each type of policy so that the consumer can make an informed choice. And, in fact, such discussions may be taking place every day. However, the insurance agents who I've encountered seem to think that term is bad, permanent is good; that purchasing term is foolish and buying permanent (no matter the cost) is wise. They seem unaware that reliable sources (the Federal Trade Commission (FTC), for example, mentioned by The Motley Fool) recommend term life for insurance protection. From 66 Ways to Save Money, the FTC advises “If you want insurance protection only, and not a savings and investment product, buy a term life insurance policy.” And, contrary to the advice to try out a policy, "If you want to buy a whole life, universal life, or other cash value policy, plan to hold it for at least 15 years. Canceling these policies after only a few years can more than double your life insurance costs."

As for me, I spoke with three agents before I found one who was willing to sell me a term policy.

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Guest's picture
jtimberman

"As for me, I spoke with three agents before I found one who was willing to sell me a term policy."

Thats because life insurance agents are typically in the business of selling whole life or group whole life policies. They're not going to recommend a product that makes them stupid amounts of money.

My financial advisor is Dave Ramsey, and he only recommends 15 or 20 level term insurance. Longer isn't necessary because if you follow his plan; you should be self insured through investments in 15 to 20 years. His recommendation is to get a face amount equal to 10 times the insured's annual salary, and about 400,000 for stay-at-home moms. Dave endorses Zander Insurance for Life, Disability and Identity Theft Protection Insurances. http://www.zanderins.com/

The author of this post is not affiliated with Dave Ramsey, the Dave Ramsey Show, or the Lampo Group, nor Zander Insurance.

Guest's picture
Shane

Dave may be right, but keep in mind who Dave's main audience is. He's for the people who over spend on credit cards, cars and houses and can't afford a 40 dollar meal.

He also suggest that you pay your house off before you invest into a 401K or Roth IRA.

Don't get me wrong, I actually enjoy Dave and bought his book. But he is for the typical American that don't have 500 dollars in the savings.

Guest's picture
Dave Dratwa

I realize this is an old thread, but I found it, so that means other people can too, and I hate to see people like Shane spread something NOT TRUE about Dave Ramsey's recommendations.

In response to Shane's statement, "He(Dave Ramsey) also suggest that you pay your house off before you invest into a 401K or Roth IRA."

Totally NOT TRUE....at no time anywhere, in any place has Dave Ramsey ever suggested this. Baby Step 4 is invest 15% on income to retirement savings, Baby step 5 is to fund kids college (if it applies to you), and Baby step 6 is to pay off the house early. Baby steps 4, 5 and 6 are performed at the same time, but in the sequential priority as listed.

Guest's picture
Marisa

My husband and I are both in our early 30s; we don't have children, nor do we intend to. And we both make enough that either of us could completely carry all of our bills and regular spending. One of my friends found out recently that we don't have life insurance and was appalled.

Are we missing the boat here? Without my husband's income, I would need to downsize somewhat in order to keep contributing to my retirement accounts and savings, but probably wouldn't need two cars or a large(ish) house for just me anyway. Is there a compelling reason that we *should* have life insurance?

Thanks very much.

Nora Dunn's picture

Great post, Julie!

Having been on the "insurance agent's" side of the table, I can assure you there are agents out there who do promote term. The trick is what you need the insurance for, and the integrity of the advisor.

A really easy way to look at term vs whole life insurance is this: Term insurance is for temporary needs, such as a mortgage (which will eventually be paid off), kids' education (which will no longer be a need once they're through school), or debt coverage (which again, will hopefully be paid off sometime)!

Whole Life is for the person wanting to cover off more permanent insurance needs like inevitable estate taxes, leaving a legacy for family, and the investment component - which can provide a tax-free income in your retirement years if you structure it properly.

Marisa: it doesn't sound like you have a pressing need for insurance, as long as you know that neither of you would fall into financial hardship if one of you were to disappear tomorrow.

Julie Rains's picture

There are alternate methods of funding "permanent" needs rather than insurance, as suggested by jbtimberman. I didn't mention it but I assume that there is a high incentive (commission) to sell whole life or perhaps a disincentive to sell term. The main thing I wanted to propose is that if a consumer is not given a choice or derided for wanting term, then he/she should look elsewhere for an agent and/or advisor.

Marisa, I had a single friend who had no debt and no dependents and some investments plus a government pension; she wondered if she needed life insurance but I couldn't think of a reason why except to pay for burial expenses. There may be other reasons. Still, there are lots of insurance calculators online that can indicate what you might need insurance for, if you need it. Here's one, for example: http://moneycentral.msn.com/investor/calcs/n_life/main.asp

Guest's picture
Marisa

Thanks for the sanity check (and the useful calculator!).

Guest's picture
Guest

I'm shopping for life insurance and appreciate the help in deciding on term or whole life insurance. I get a lot of offers in the mail for life insurance and got one today from Sears Life Insurance Co. I trust Sears but at the bottom it says, in part: this insurance is not insured by the Federal Insurance Corp (FDIC). Should I be looking for a company that IS insured by FDIC? Is that necessary or desirable?
Thanks!

Julie Rains's picture

That's an interesting question.

It looks like the FDIC disclaimer is a general one on the part of Sears. Bank deposits are insured but mutual funds, life insurance, etc. are not. Here's a link to the FDIC site: http://www.fdic.gov/consumers/consumer/information/fdiciorn.html

You could also check out insurance company ratings at http://www.ambest.com/.

 

Guest's picture
Jeff Zander

Great comments. I wish you would have called me since I only sell term life insurance...by choice! To add to your position, so many cash value agents try and compare the rates of returns between the cash value policy, which they emphasize is tax-deferred, and the investment return of the alternate investment. Don't be fooled by this "sales" tactic. Even with this tax deferred treatment your anaylsis is dead on. Also, remember that most people in this country are in debt. If they use the savings generated from purchasing term life instead of cash value plans to pay down debt fisrt then save then the financial comparison is based on the interst rate being charged on the debt which is even more substantial that the 5-10% return you earn on an investment. Cash value agents sell their product in a vaccum pushing all the "bells and whistles" but not really looking at the client's overall picture. This way they can sell their product without really focusing on good financial advice for their client. Thanks for the opportunity to rant.

Guest's picture
Ted

Annual rate of return for INSURANCE 9.18%, & INVESTMENT 10%
Results Summary INVESTING AND BUYING TERM INSURANCE
Savings Results Summary
Amount to save per month: $353
Years to save: 30
Annual rate of return: 10%
Federal tax rate: 25.00%
State tax rate: 8.00%
Total savings after 30 years: $733,990
Savings after taxes: $392,799

INVESTMENT OPPORTUNITY LOST ON AMOUNT PAID FOR TERM INSURANCE:

Term cost, LOST INVESTMENT OPPORTUNITY INCOME ($75,667)
Results Summary Money paid for Term Insurance
Savings Results Summary
Amount to save per month: AMOUNT PAID FOR TERM $68
Years to save: 30
Annual rate of return: 10%
Federal tax rate: 25.00%
State tax rate: 8.00%
Total savings after 30 years: $141,392
LOST Savings after taxes: ($75,667)

BUY IEUL OR TERM INSURNACE

After 30 years
IEU Life Buy Term and - Invest the Deference
Surrender Value Death Benefit Investment Value
$525,417.00 $1,025,417 $392,799

With the IEUL product, you could spend $392,799 (the full amount from your investment) and still have $132,618 available. You would still be able to leaving your family an inheritance of $632,618 tax free upon your death. With Term, inheritance ZERO.

ILLUSTRATION PART DETAIL
Premium Cumulative Surrender Death
Age Year Outlay Premium Value Benefit
60 30 5,052 151,560 525,417 1,025,417
61 31 0 151,560 573,713 1,073,713

Guest's picture
Jeff Zander

Before I am too critical of the response I must admit that this is afairly typical response...to throw out numbers that are not accountable or accurate and without must explanation of their basis. Your calculations that the two investment returns of 9.18% on the insurance and 10% on the investment are a concocted comparison because over the course of the 20-30 period of these policies none of them have paid 9.1% especially when you factor in the higher expense costs. If you visit National Underwriter.com you will see the past 20 year rates of return for whole life, universal and variable life policies of the top carriers and none of them achieve this return for the period. That is the fallacy of the presentation. Agents use current rates of return as a projection for the future. This is why so many policies fall apart in future years or require additional payments. The whole life rate of return is actually a negative in manner cases. Additionally the statement..."With Term, Inheritance Zero" is not accurate because the savings which accumulated over the 20 or 30 period from not buying the cash value plan is the inheritance, which is also available throughout the term of the insurance coverage. If you die during with the cash value policy you get only the policy death benefit, not you cash value account, unless you selected an even more expensive death benefit option. The Indexed nature of the policy you are referencing does not change the argument because somehow it has a better rate of return...only if you illustrate it that way.

Julie Rains's picture

I am very interested in spending my money while I am alive, rather than leave an inheritance, though that scenario may be attractive to others.

Some ideas about taxes:

  1. Taxes may or may not be 25% + 8% or close to those amounts, depending on tax structure of your investments.
  2. If you used after tax money and just made regular investments (and never sold the investments during this entire 30 years) and then you sold the investments all at once, you would trigger long-term capital gains tax on your gains (value of the investment less the cost basis).
  3. If you invested the money in a Roth IRA, then you would not owe taxes (yes I realize that you couldn't invest the entire $353 per month but you would avoid some of these taxes).
  4. You might also put the money into a 529 account and not owe taxes in the end so you could perhaps send your grandchildren to college and watch them graduate rather than leaving the inheritance.
  5. If you had invested this money in an IRA or 401(k) you would have received tax benefits at that time, which should be put into the calculations.

There may be some unique features to the IEU Life product that I am not familiar with; if you visit again, perhaps you can leave a link to information about this product.

Julie Rains's picture

So, judging from Jeff's response, then the IEU Life product is a whole-life type product. (We were posting at the exact same time). Just a note: if you apply a .33% tax rate to $733,990 then you would have $491,773 left over.

Guest's picture
Jeff Zander

The IEU policy is a hybrid of universal life (cash value) insurance typically standing for Indexed Equity Universal life. It's rate of return is supposed to mirror, to a lesser degree, the return of the stock market but without the volatility. However the pricing mechanism for the policy is the same as all other cash value plans...based on interst rate or earnings projections that are determined by the agent presenting, with some limitations, and if they are not achieved then the policy will lapse in later years unless additional premiums are paid. The drawbacks still remain just as with all other cash value plans even without this financial strategy.

Guest's picture
Jeff Zander

Here I go again...the other thing to remember in this financial calulation submitted by Ted is that for many people once they get out of debt and use the savings from the cash value policy to make investments...many of these investment opportunities may also be tax deferred such as participating or maximizing in a company or individual retirement plan, setting up an ESA or 529 Plan or even have some tax free growth by utilizing a Roth IRA. This negates the whole comparison since we know that so many people today are barely taking advantage of their tax favored investment opportunities compared to this 9.1 vs 10% comparison. Even if the rates of returns are equal, which they are not because a cash value plan invested in a mutual fund has higher expense costs vs. the same direct investment in a mutual fund, the other drawbacks about cash value plans are still prevalent. It is just not a good investment product. Buy term life insurance to protect your family and invest your money wisely with the better products available.

Guest's picture
Opie from mayberry

Really it's just this simple. You are insuring a probability vs. a certainty. Forget the numbers for a second...

Term insurance covers a probability, permanent covers a certainty. Which risk is more expensive to cover?

Now thinking of the numbers, a permanent policy should offer the return and safety a of a AAA bond. To compare it to equity returns again is silly as they do not share the same risk. IF you were to choose permanent coverage because of it's tax advantages and returns you could jazz up your investment portfoilio a bit more, couldn't you? It should never be either or, it should be both.

With all respect to those who advise after 20 years you won't need insurance, I simply ask what if you're wrong? Putting together a plan for an individual SHOULD by all means possess options that will allow some flexibility in case things don't work the way you planned. To offer finanical advice in absolutes is just as wrong as telling folks one type of insurance will do.

Always plan for mistakes, market swings, job loss, disability, death, raising the grandkids, etc... A finanical plan should offer enough flexibility to weather any thing that happens..

The set after 20 years crowd has always been around, the funny thing is shouldn't there be more people SET?

I sell what the client needs, with the option to change if their plans or ideals change along the way... The highest return isn't necessarily the best choice every time...Some things are meant to be different and fill a differnet role in a plan...

Guest's picture
jeff zander

I found your comments interesting but also contradictory. Insuring a probability vs. a certainty is really just another smoke screen. All insurance was intended and developed to protect against the uncertainty of an event. By turning the approach into a vehicle that protects a certainty makes it more a investment than an insurance product and should be measured and compared on that level. We all know that insurance plans measured from strictly an investment standpoint are a poor choice no matter how you want to compare it...bonds, stocks, whatever...based on their rate of return even when considering the "tax advantages and returns" you allude to. The fees and the adminstrative costs reduce their value when you compare them head to head with the same investment option outside of the policy (bond vs bond, etc.).

Also, as an investment advisor you are aware that most people are not even taking advantage of their tax deferred or tax free options availalble to them whether through their employers or elsewhere (401k's, IRA's, Roth's). Taking advantage of these plans first are clearly more beneficial and a much better investment option that the purchasing a plan that tries to co-mingle two approaches and fails on both levels.

The idea that after 20 years you are without insurance is easily dealt with and can be measured. Your startegy is to plan for disaster and assume the worst in the direction of a client's plan. Yes, there can be setbacks but over a 20 year period there is plenty of time to correct and adjust unanticipated issues. Also, you can purchase 30 year plans which provide an additional time frame for planning. In addition, the fear tactic that many agents use that after 20 years you may not be able to get coverage is simply that...a scare tactic. It is a possiblity but with advances in medical care and underwriting the number of poeple that are declined coverage today in our agency is less than 5% and we process over 25,000 applications a year. Yes, the insurance is more expensive 20 years later but still affordable and accessible for most in their 50's, 60's and even 70's.

I would agree that any financial plan has to plan for setbacks and challenges. That's why an emergency fund equal to 3-6 months income is an integral part of any plan and addesses the concerns you noted: " mistakes, market swings, job loss, disability, death, raising the grandkids, etc..." Emergency funds, maximizing retirement and savings option's, disability insurance, term life insurance and investing accomplish the same security you note in a more effective manner. Or that would at least be my opinion.

Guest's picture
opie

"It is a possiblity but with advances in medical care and underwriting the number of poeple that are declined coverage today in our agency is less than 5% and we process over 25,000 applications a year. Yes, the insurance is more expensive 20 years later but still affordable and accessible for most in their 50's, 60's and even 70's. "

but jeff, what about the people who don't make it through your pre-screening? I don't think you're being all that straight forward yourself here. You prescreen and for some folks you already say "no" by not taking the appication. How many of those are there? Aren't you really saying of the people who think they can buy insurance only 5% can't? However the diabetics, the hypertensives, the depressed.... not so much right?

Guest's picture

Seniors who have yet to put insurance into their retirement plan may find that a small amount of whole life is the best option for protecting a spouse or providing final expenses after they are gone. While many people may have already purchased some form of term policy for the protection of a spouse or children much earlier in life, some may find that have little or no protection that will continue until they are older and provide a benefit for their spouse long after a term policy would have terminated. Considering how long people are living today, it is imperative that seniors with limited resources have something in place before they become uninsurable.

Unfortunately many people think about the need for life insurance well after it is too late and they have already been diagnosed with a medical condition. So, for a senior couple it is important to lock in a permanent life insurance policy that will be there for your entire life before your health deteriorates. Term is inexpensive but it is designed to last only for a specific period in your life.
Why Whole Life over Inexpensive Term
Term insurance typically offers a lower premium in comparison to a whole life policy, these policies are usually purchased during the earlier years of an insured individuals' life. These term type of policies have a specific time frame or term period as the name implies. These policies will usually include renewal opportunities with premiums that can increase substantially as an insured grows older. Often times these types of policies will include a clause requiring new evidence of insurability. So, if you were ill, it might be impossible to get insurance after you develop a health condition or the policy may become unaffordable at a time when you might need it most. On the other hand a whole life policies remains in force, as the policy's name implies, for your whole life as long as you continue to pay the premiums or the cash value remains in force. Term life insurance is usually only renewable to age 75 and terminates at policy end date if not renewed.
Insurance Protection for Older Families
Whole Life plans have several benefits to seniors: Most policies can be written on an insured until the age 85 years of age and can maintain in force until death. Typically when applying for small amounts of whole life coverage you will not have to take a medical exam or have any blood work examined. As you can see, these plans also have greater flexibility to meet age and health history requirements.

Purpose of Whole Life for Seniors
• Funeral expenses
• Provide income for senior spouse or child beneficiary's after your death
• To insure coverage to age 100 or guaranteed death benefit to beneficiary
• To build cash value and create a supplemental income stream for retirement
• Children purchase whole life for parents to insure security of other parent
• Insurance for seniors who may have been declined for coverage previously
• To leave an estate or college fund for grandchildren

In Addition to a death benefit that is payable to your beneficiary, a whole life policy can also builds up what is referred to as "cash value," or liquid reserve that essentially is a growing tax deferred savings feature that you can withdraw or borrow against. If the policy is purchased early enough or funded heavily in the beginning it can provide a nice retirement resource that can be drawn from at retirement since little can be expected from social security. Many have found this to be a valuable feature if they need additional sources of retirement income to meet daily living expenses. The additional cash value can also fulfill a need for unplanned long term care which is not completely covered by Medicare.
For those married seniors on a fixed budget small amounts of whole life are essential to providing final expense coverage and protecting the remaining loved one for their remaining life at a time they may be unable to go back to work and provide financial support to provide for their own well being. Whole Life was designed to be a simple, fast, and affordable way to secure life insurance for seniors.

Christopher Beard is a virtual agent who uses automation to simplify the consumer buying experience. He is the president of Trinity 1 Financial Group and works with clients planning mortgages, insurance and annuity wealth building strategies. Visit his site at for an free instant term life quote:
www.trinity1financialgroup.com or obtain a life quote at
www.gotermquote.com

Guest's picture
Jeffrey Zander

While I strongly believe that Chris' comments above are genuine and his intent to help and serve the senior market is admirable...the information provided and the reasoning is somewhat flawed. If someone has reached their senior years and has not done planning for the variables noted in his comments a little bit of life insurance is not going to help regardless of the type purchased...whether term life or cash value plans. Each of the reasons mentioned that supposedly create value for the cash value/whole life plans only raise the amount of coverage needed thereby raising the cost of the plan.

If you want a little burial policy, yes it is easier to qualify for but that will not get you too far in the other areas addressed as being benefits provided...supplement income, investment growth, estate planning, and college planning. These are all important goals or strategies to have but can not be accomplished with a "small amount of life insurance". These little burial type policies range from $2000 to 15,000 in coverage generally and on a per thousand basis of cost are expensive due to the applicants age and the whole life nature of the coverage. They just seem more affordable because they are based on small amounts. In addition, each one of the other policy features mentioned are really just an over statement since each of these goals simply add to what the policy value really needs to be which would raise the cost of the plan significantly. If you see past the imagery created it is just another method of hyping all the features of cash value plans based on the "flexibility" of the program and the premise that people need life insurance for their "whole life". I could not disagree more and in the end the comments and the numbers don't match up.

Forget all the other "great" features of life insurance noted for a moment. Just think about the concept of why you are buying the protection. It is purchased so that you can meet obligations and debts that currently you do not have the resources otherwise to take care of. As a tool in your financial plan you need life insurance for that period which corresponds to your inability to be able to provide for your family or pay bills. When you buy cash value insurance you are basically saying that I plan on being in debt and not being able to provide for my family for the rest of my life. All the other features that are pushed about cash value plans only distract from that premise.

Now many will say that cash value plans simply give you flexibility to plan for all variables; death, living, indebtedness, retirement, wealth transfer, etc. But many of the comments about term insurance mentioned earlier are incorrect and antiquated. You can purchase term insurance today for 10, 15,20,30 and new 40 and 50 plans are being offered. All of these plans have guaranteed coverage (no requalification required) during the period purchased. In addition, coverage can be purchased today on individuals up to 80 years old. Yes, the premium is expensive but you should see the cost of cash value plans...often 10 times higher. In addition, most reputable plans actually renew until age 95 though they get very expensive after the initial guaranteed premium period.

I don't profess that seniors now should be buying any type of life insurance unless they have debt or an inability to provide for their spouse at their death. There are so many other better investment options available to people and you should only buy life insurance...if you need life insurance. However, the concept of buying term and investing the difference still has financial merit since the significant savings from buying the term policy instead of the cash value plan can be invested over the remining years of life and will in essence build a savings fund that can address these same strategies more effectively. If you die prematurely then the death benefit from the policy and your separate savings are available to you instead of just the cash value death benefit. Remember when you die with a cash value plan you only get the policy amount not your savings also. If you die after the term policy expires then the savings from not buying the cash value plan and investing it over the years is the resource for burial and the other goals noted.

Is either of these approaches a perfect resolution to a senior who has not done proper planning through their life and now find themselves unable to meet financial responsibilities later in life...NO! But using a poorly designed, expensive cash value life insurance plan and over-reaching on what it can really accomplish is not an effective strategy either. The comments above are really just recycled logic to get people in their younger years to buy these plans based on the same flawed premise as evidenced by the comment..."If the policy is purchased early enough or funded heavily in the beginning...". If while you are younger, during that 30-40 year period while carrying term life insurance, you budget your resources, get out of debt, maximize retirment plan options, invest the savings from not buying cash value insurance and generally follow a plan of just basic common sense financial decision-making you will not have the long term need for any life insurance and be able to prosper from better investment options. If you don't do these things and wait to plan your financial needs when you are a senior I doubt you will be able to follow anyone's advise.

Guest's picture
George in WI

I was reading some comments above and did I understand it correctly that there is 33% tax on whole life?

Also, I asked on another forum about low cost life insurance quotes and was told that for $400 a year I can get $500k term policy for 20 years. That seems incredibly cheap. Thoughts?

Julie Rains's picture

Term policies can be inexpensive; it would depend on the age of the person and health though. Here is an online tool (commercial site).

If money is taken out of the policy, it may be taxed -- see this article on term and whole life.

Guest's picture
Jeff Zander

As a response to the comments above there is no time when I am anything but straightforward. Your assertion that there are more people who do not make it thru our pre-screening process is accurate but not because of eligibility. They make the personal financial choice to not purchase the coverage many times at a price that is still affordable in perspective to their medical risk but either don't have the money or do not place enough value when comparing the cost and benefit provided. For example a female Age 60 with type 2 diabetes treated with insulin would run approx. $1934 per year for $300,000 on a 15 year level term plan assuming no other major health issues. A history of depression would be even less. The male rate is $2875. The prices drop to $1389 for female and $2170 for male on 10 years plans and will are approximately double for those at age 70. These are all high rated cases based on the health history examples you noted. Prices are greatly reduced when you get into the preferred and standard rates classes. However people continue to decide not to purchase coverage even when the cost for a 60 year old for $300,000 is as low as $800 a year. All of these amounts are affordable depending on the personal circumstance of the individual. In addition, I don't believe the answer to your concern is for someone to buy an inferior investment related product that will cost them 8-10 times the cost of term when they are healthy just so they can have coverage if they need it in later years. A true financial advisor tries to manage their clients total financial picture by helping clients focus on the real menaces to their financial future...DEBT. By using the savings from buying term an individual can eliminate high cost debt such as credit cards and eventually all debt and will be much better focused on growing wealth with better financial instruments than insurance...even with the tax deferred (not tax free) benefits a cash value plan offers. Remember any growth in a cash value plan over your premium payments (cost basis) is taxable at your income tax rate when you withdraw them...if there is an increase. Many cash value agents will tell you it can be tax free instead of deferred since you can borrow against the cash value instead of withdrawing it. But then you pay interest for access to your own money and when you die they reduce the death benefit by the loan amount. That doesn't sound free to me. The scare tactic that most companies use about being without insurance has been very effective for over a century. However with the advancement in the last 20 years in long term guaranteed level term style plans, inproved medical care and underwriting analysis the amount of people truly affected by this issue is very small. In addition, it assumes you will always be in debt and not capable of handling your financial responsibilites for the rest of your life. Not a strategy I follow or recommend to my clients.

Guest's picture
kav122

I think that you explained term life very well! I am a Dave fan, but now I really *understand* why he promotes term over whole.

Guest's picture
Ins Guy

Very interesting posts. It is unfortunate that there is so much buzz in the industry today about permanent insurance being a "bad thing". Again, most of you are right that term can fill temporary need but it is only "rental" of insurance coverage. Why rent when you can own? The trivial discussion regarding the cost of pure insurance offered under permanent vs. term is a shortsighted argument. The REAL issue is that permanent insurance works best as an investment for retirement. If you don't want choices for retirement then go the cheap route and buy term insurance. Invest all of your excess funds in your IRA to the maximum and then put the rest in safe accounts that offer little to no return. Here is where you will be at retirement age (say 65). You will have no insurance coverage and no way to get it if needed. Inflation will have outstripped your safe investments negating wahtever interest you may have reinvested during the period of those investments. Your IRA's will be full of cash but heres the wake up call...that money is not all yours, its just temporarily on your letterhead. The government will decide how much of your IRA you will keep by setting the tax rates. Does anyone here think our tax rates will be lower in the future? If so I have bridges for sale. In 1982 the highest personal income tax rate was 70%, so go ahead and save your money for the government....I can't think of a better investment strategy! (sarcasm of course)

Permanent insurance works best for people that have an insurable need above $250k, AND would like to save money for tax free retirement. Indexed products are great becaiuse there is no risk of loss of principal, and earnings that are capped and floored. This means in good market times, you will earn the cap, and in bad time such as now you will not lose principal and you will likely not make any investment returns. OK so, is there anyone out there that is sick about watching their retirement accounts shedding 40% of their value? Are you comfortable with that? I can't understany why if you are.

Insurance and investments are not about the numbers, it is about choices. The more choices you have the better off you are. Why? Because who knows what is going to happen in the future. A good insurance guy will monitor your insurance every year and compare it to what was sold to you, if it is not performing they need to fix it, if it is performing, you need to know that...every year!

If your need for the death benefit goes away, then drop the face on the policy to the minimum and this drive wup the cash value. A properly sold and monitored policy will ALWAYS outperform buying term and investing the difference. The problem in this industry is that many policies are not sold properly nor are they monitored like they should be. If your agent does not report back to you every year and give you a synopsis of your investment then he is not a good agent at all. Commissions are paid up front, responsible agents reserve part of their earnings to fund the ongoing monitoring costs. Very seldom does this occur so here we are, wiith permanent insurance taking on a bad image. Its not the financial vehicle you choose, its the person behind it. Buyer beware and don't hand all of your retirement cash to uncle sam, there are better ways to use your own money.

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Wealthy Woman

Thanks so much for your wisdom in regards to the debate over term vs. permanent. You are right in your analysis. The average American investor needs to wake up and commit to re-educating themselves about possible options that can help them grow their money tax-free and with a decent rate of return with moderate to low risk!

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Guest

You can follow suit with 80% of the CEO's if you are in their income level. Otherwise, affordability, tax benefits, and other factors will blow your argument out of the window right away.

Guest's picture
Andy BIrdsell

great article! I am a converted agent (captive to independent) and focus on term insurance for my clients. What I see though with the idea, "buy term and invest the difference," is that NOBODY seems to invest the difference... I am a huge proponent of this IF you invest the difference

Thanks!

Guest's picture
DC

Can someone explain if I am correct about EUIL insurance. The only great way to fund it is to max fund it in five years. Technically, it could be funded in four years and one day (Jan.1 of the 5th year). You fund equal amounts 5 times. If you over fund it, it becomes a modified endowment contract and is then subject to being taxed. If you max fund it properly in 5 installments, then the contributions gain interest tax free. There is a guranteed minimum interest rate earned, and a maximun interest rate earned, based on what the "market" does. Most EUIL policies are indexed to the standard & poor 500. This index is not actually "tied in" to the S&P 500, but indexed according to the companies own investment strategies based on their success or failure. Either way, if the market is up, you will get a max guranteed rate of interest, usually 12% to 15% max percent on most policies. If the market is down, most policies will gurantee a low of 1% or 0%. You are guranteed to never lose your principal or the interest gains you have made. There are heavy fees in the first 5 years that pay for the policy such as agent commissions, cost of insurance, etc. If you take a loan on your money in the first 10 years, there is a loan fee, but the offset is that the contributions are also tax free & accumulating tax free. The policy will have a death bennefit based on the amount funded. The goal is to not touch the money until needed at retirement, which then can be withdrawn tax free for as long as there is money in the fund. It also transfers to your heirs tax free (no capital gains tax), although there would still be an inheritence tax. This fund is approved by the IRS rule 7702. It is an investment vehicle tied to a life insurance product. Summary: Max fund for 5-years, contributions are tax free, gains interest tax free, withdraw at retirement tax free, transfers to heirs tax free(no capital gains), EUIL's have averaged approx. 8.9% over the last 20 years. So, even with heavy up-front fee's, how can a totally tax free investment that gains an average rate of 8.9% with a gurantee of no principal loss and a guranteed interest spread be a bad thing when a volatile market can occur at any time? You obviously have to qualify for the insurance, but if you are young enough, healthy enough, and have a decent sum to fund the account, you can have a nice tax free retirement fund till age 100 or beyond. Any comments on this are very welcomed. Thanks!

Guest's picture
DC

Sorry, my above title was spelled wrong. It's EIUL

Julie Rains's picture

You may mean equity indexed life insurance (EILI). A nice article on borrowing against the policy (which some may have to do if they can't afford to save b/c of the premium costs) by an insurance pro and EILI fan gives scenarios to consider that may lead to losing the policy altogether.

Another vehicle to have tax-free investments is the Roth, which can be funded with index funds -- the principal is available tax free if needed in an emergency. Not everyone qualifies but is something to consider and fees are minimal.

Guest's picture
Dolores

Definitely whole life insurance. Buy it from Gerber or NY Life, they give the best quotes.

Guest's picture
Mr. Pauly

I love to read about the debate over term v. perm. Especially when paid and compensated financial 'gurus' on TV are praising the self-insuring and investing when they themselves have whole life or a variant themselves. Why would someone want to be self-insured with say $600,000 of a lifetime of savings make MOST ALL of that subject to tax and wind up having the government potentially take half? Who has the discipline to invest or a better question, the financial prowess? If Whole life insurance was such a bad idea, it wouldn't have been around for generations.

Term is NOT cheaper in the long run. What is someone to do at the end of 20 or 30 years? Lets add, uninsurable to the mix as well? Most people when they retire do so in much of the same pre-retirement debt but only making about half to 2/3 of pre-retirement income. That's not a time to try to buy whole life burial plan that you could have bought 30 years ago for dollars a month. What would you rather do rent a home of buy it? Have a real stake in it? The cost of ANY insurance at retirement is ridiculous, but necessary charge to make a profit on.

I make options available to all my clients and explain clearly the differences. This is the basis for 'needs' instead of wants based selling. Both have merits just make sure that you "ask the right questions" and understand before you make your decision. As pointed out previously, determining that term is not the best choice 10-15 years down the road will be costly.

-Mr. Pauly, FIC, MBA licensed insurance agent and registered representative. 12+ years in the business

Guest's picture
Jason

Interesting post. Being an agent I would like to read more of what you think.

Jason

Julie Rains's picture

Glad that there are those who discuss multiple options, pros and cons. And, yes, it would be bad to go into retirement with debt -- in fact, if you have debt in retirement, you may need to sell off assets just to make the mortgage payment, which then increases your taxes, and off you go into a downward spiral. The insurance could be your safety net then.

But what I am concerned about is having to pay so much for insurance that you aren't able to save or pay off a mortgage. Mine, for example, is paid off; others, who are my age and older, many who work in the financial industry and promote life insurance have mortgages that won't be paid for 20 or 30 more years b/c of multiple cash-outs. So, the option of getting rid of debt can work and seems more straightforward to me.

 

 

Guest's picture
Kevin

Nice Post!

Here is a nice tool to calculate how much insurance you might need.

http://partners.leadfusion.com/tools/allstate/lifeins01/tool.fcs

Hope you like it.

Thanks,
Kevin N
Allstate Advocate

Julie Rains's picture

There are some folks (not necessarily Ramsey audience members) who opt to pay off debt and live without certain insurance agreements that have net worth above $500 (unless you mean $500K). Advice can be simple and boring and still work well for people. Thanks for visiting and adding to the conversation.

Guest's picture

If you want a positive view of term life insurance, you can check out Linda Rey of Rey Insurance's article: http://bit.ly/cWjUqC
It talks about why you might want coverage and how much you need.

Guest's picture
Guest

You neglect to realize that

1. What guarantee do you have that you will make 5 or even 10%? Stocks over the last 30 years have made only 5.43%.
2. Your not actually making 5 or 10% You making anywhere between 20% to 40% less than that, because you didn't factor in taxes to that equation. Factor that in, and then the spread narrows. Life Insurance is tax free.
3. What about asset protection? If you get sued, that money in the policy doesn't get touched. You should add in the cost of an umbrella policy to that as well, if you don't factor in that benefit.

Whole Life Insurance hasn't been around for years because it's a rip-off or doesn't provide proper benefits.

Julie Rains's picture

There are no guarantees for returns as with many investment products. At the time of writing, the returns represented rates over the past 20-30 years.

Money set aside in a Roth IRA can be distributed tax-free and is available before you die to spend as you like; contributions can be taken out with no penalties but earnings need to be taken out for retirement. See your tax advisor.

Umbrella policies are generally very inexpensive and can be purchased separately ($100-200 or so for $1 million of coverage, for example); these proceeds should be available if needed without tapping other investments.

There can be advantages to separating investments from insurance.

Guest's picture
Lilly Adams

Searching for a Term Life Insurance Quote is very time consuming. I found this website that searched over 200 companies to find the best quote that fits your needs. Every year they review your needs to make sure you have the policy for you. Check out this website I am sure it is going to help you. http://www.buytermlife.com

Guest's picture
Brock

I am an insurance agent and believe life insurance is important. Term better for some and Permanent better for others. The most important thing to remember is if you buy term make sure it is convertible (to permanent insurance). If you are half way through your term insurance policy and get cancer, convert, convert, convert. This does not require new medical, the premium is based only on your age. Permanent definetly has it's place and somebody tell me Permanent insurance in this case is bad, especially if the cancer is terminal. Another thing to remember is when the death benefit is payed to the beneficiary, there are no taxes. I think this is important when comparing to mutual funds that can accumulate wealth, when you pass away how much of it will be paid in taxes. Insurance doesn't have to have the same percentage of returns as mutual funds to be better if the purpose of the money is to hand down to family members or charities. It is my job to find out the intent, then inform my clients of pros and cons given the intent.

Guest's picture
ThiswayorThat

A small detail I see overlooked a great deal is: An estate can be taxed upwards of 50% upon death. Investments saved can be taxed upwards of 30%. However, life insurance payouts upon death are not taxed. I think there is a limit to the non-taxed portion though. Something like the first $160,000.00. I'm not a licensed life agent, so I'm not sure. But this has to effect the values a great deal. Also, mutual investors always use 12%, which is the most they are legally allowed to cite. But what is the actual average rate of return on mutual funds investments? Again, I'm not a financial planner either. So I don't have the answer to that. But it seems on the surface that whole life has more value than professional funds investors seem to give it.

Julie Rains's picture

Thanks for your comments. One thing that is difficult about this I think is that the tax laws keep changing. Right now, though, you can put aside money in a Roth that will not be taxed upon withdrawal so that is a way of avoiding taxation but still having control of your money. Still another topic (that I hope to explore in greater depth soon with an insurance expert) is the difference between death benefits and investment portions of the policy or contract; my understanding is that the death benefit is not taxable but the investment portion (the money that grows in the policy) is.

Guest's picture
Guest

The REAL value of the whole life hasn't been mentioned. If you own whole life as you are entering the retirement years, when you don't 'need' it anymore, you then unlock a different set of distribution options for your money.

The whole life insurance makes all of your other investments so much more valuable when you have the freedom and flexibililty to spend them down to zero instead of having to live off of interest only...which is the highest tax option, and the riskiest option when you consider the way the market has been over the last 10-12 years. Owning whole life has nothing to do with the cash value (or at least that isn't the main reason to own it). It has always been amazing to me that the financial entertainers of the world don't seem to understand this concept.

Every time I have run the calculation, the value of a whole life policy is something between 12-15% if you tried to calculate the amount of tax free money you would have to accumulate to create the same leveraging power as a whole life policy.

It is a wonderful product in the context of an all around financial plan.

Guest's picture
ThiswayorThat

Thanks for the reply. That's a very good point and one I hadn't thought of. My wife and I scheduled to meet our financial planner in the next week. I'll ask about that.

As a side note, I was at a political rally here in Michigan this past week. I struck up a conversation with a man that was 74 years old. He said his biggest mistake was not getting whole life. At his age now, he can't get anything and with the market crash he couldn't sustain the lifestyle he had built up as he was living off his investments. Which are mostly now gone.

Perhaps whole life should be seen as just a part of a well balanced portfolio.

Guest's picture
Chris

The debate over this is so heated and split. Here's my story. My grandparents are farmers from Iowa who lived through the Great Depression. Somehow, they started and maintained a whole life policy through New York Life. When my grandma died unexpectedly 2 years ago at the age of 81, she died knowing that she and my grandpa had already decided to gift her 3 grandkids 2 separate gifts of $13,000 (one in December and one in January of a new tax year for a total of $26,000). Most likely, she would not have had life insurance had it been a term policy at that age. She and grandpa had the satisfaction of helping their grandkids...for me, it couldn't have been more unexpected or come at a better time. It immediately motivated me and my wife to put steps in place to do the same for our loved ones someday. I know it is expensive, but if we blend a policy with term and whole life and add paid up additions, we have a tax free option that we can use while still alive (hopefully) if we want to. A 529 must be used for education....this we could use for anything we want. We will earn too much for a Roth starting this year, so we continue to like this as an option for us. If you go with a reputable company, and find an agent willing to do what is best for you instead of their wallet, then whole life may give you something term cannot...peace of mind for a lifetime. I'm a teacher, and my wife is a pharmacist, and we are ok with being "crazy" enough to throw our money away as so many suggest when investing in a whole life policy...we are investing in options and peace of mind having seen what it can do.

Guest's picture
Brenda Lin

If you already own permanent life insurance the decision is tougher, especially if you have a paid up policy soon. But for most people looking for insurance term is a clear winner. Permanent life is really only necessary for people with estate planning needs. If you want to save, simply buy term and invest the difference in a tax deferred retirement account. You can get a policy from a site like Life Ant (intelliquote is also good) for less than $30 a month, or about 1/10 of what whole life is going to cost you. Then save the savings for retirement, and live well when your ready.