The cost of permanent or cash value life insurance has long been an anathema with many financial advisors, who believe that permanent life is too expensive, and the cheaper term life is the way to go. This belief is captured in the popular saying: “buy term and invest the savings.” Another objection is that most people do not need any life insurance in later years as they would have accumulated enough assets to cover their financial needs, particularly because they have already fulfilled such obligations as paying off their mortgage and their children’s college. Accordingly, many advisors would not recommend permanent life insurance to their clients.
I do not think that this is a helpful approach to dealing with life insurance as I believe that clients need to understand the fundamental principles and the utility of term versus permanent life.
I believe that people need both kinds of insurance, oftentimes simultaneously.
My view is that term life is protection against premature death, while permanent life is protection against mature death when people in advanced age may encounter unexpected financial calamities, such as the loss of life savings due to market conditions, or exorbitant medical bills caused by health conditions that were never anticipated.
Given the recent incidents of wild fire on the west coast, and hurricane and flooding on the east coast, we must also be cognizant that our life savings may be vulnerable to natural disasters that may not be fully covered by other types of insurance. In such events, a permanent life policy with sufficient cash value would provide an invaluable reserve to help manage any number of financial disasters that we have no control over.
The Cost Of Term Life
It is true that term life is very cheap. It is best for young people when they need maximum protection for their family at low cost due to their limited resources. Term life is cheap because it is only temporary protection for 10, 20 or 30 years, and few people actually claim the death benefit. It has been estimated that only 1 percent - 3 percent of term life policies result in a claim. Essentially, one would pay premium on a policy for years until it expires without getting any benefit in return.
Conversely, a permanent life policy covers a lifetime, which can mean 100 or more in years. It is more expensive because it offers seven times (70 years) more in coverage than a 10-year term life, and more than two times in coverage than a 30-year term policy, assuming that the policy begins at age 30. The problem is that a term life policy for 70 years does not exist.
What exists is that if clients in good health want an additional 30-year term life policy at age 60, it would not be available at any cost. They may get a 20-year policy for $6,057 per year for a $1 million death benefit for a man, and $3,639 for a woman, or a 25-year policy for $9,980 for a man and $6,384 for a woman.
Here is a real life illustration. A recent client of mine, who is now 74, had a triple heart bypass in his 50s, and has been in good health since. At 64, he took out a 20-year term policy for $100,000 that costs $3,233 per year. However, the premium schedule for the policy indicates that by age 79, his premium will increase to $42,920 a year, and by age 84, which is the end of the 20-year term, the premium will skyrocket to $61,955 per year.