It is 2021, marking my 40th year in the insurance business. Ever since I started this career, there has been the ongoing debate of term insurance versus permanent life insurance as if it is a battle between two heavyweight titans. Honestly, there is no battle—they are in different divisions. Both have their place. There is no binary choice between one or the other. To me, the answer is simple – you need both, but they are necessary at contrasting times.
Renting vs. Owning
So, let me paint a picture for you that will help deepen your understanding of the differences between Term and Perm products. We will look at the task of finding a place to live. This discussion, I think, should prove to be a useful analogy.
Typically, when you are young, you have limited resources. You are not at your peak earning years and have little credit. However, you want to move out of your parents’ house, and into an apartment. You know this living situation is temporary, and you may even endure a roommate (or two) to save more. Most people do this with the intent that, eventually, they can buy their own home. In this analogy, you want to purchase a house.
There is a vast difference between renting and owning a home. Owning a home is often referred to as part of the American dream.
When you rent, your lease agreements may change from year to year. You, the renter, are not in control. The landlord is in control and dictates the terms. If you do not like the terms of the agreement, your only choice is to pack up and move. Moving is often at significant expense and disruption to your life, and when you leave a rental, you may or may not get your deposit back.
There are so many unknowns in renting. Yet, millions of Americans do it. Why? Well, my belief is the front-end economics are so compelling that renting is their best-priced option to find immediate, but temporary, shelter.
When do buyers choose term insurance?
The front-end economics of term insurance are compelling. You may purchase term insurance if you are young, just starting out, and your obligations exceed your ability to cover them. If something were to happen to you, term insurance can cover obligations that you would have handled during the first 10-30 years of establishing wealth and assets. This makes term insurance an obvious choice.
In this scenario, you have limited means while in need of maximum coverage and protection. Protection comes at a price. The price is not the premium paid. It is (like the rental analogy) the terms of your lease. Term insurance expires, too often, when it is needed most. Less than 1% of term policies result in a claim paid!
When do buyers choose permanent insurance?
Permanent policies, like homeownership, address a distinct set of circumstances.
First, permanent insurance is designed to address the inevitable: death. At some point, we all die, and permanent is often the best choice to make sure there is coverage when you need it most- when you are older and can no longer qualify for term insurance. By then, no insurance company will sell it to you. Remember my rental analogy? Property owners will not rent to you anymore! Death is guaranteed for all of us, and permanent insurance can be too.
Second, permanent insurance is an asset like a home and has value. It builds equity, like a home, in terms of cash values. You can borrow against your policy just like you can take out a home loan. Except, with an insurance policy, you are both the lender and borrower. Permanent life insurance is like a home; it can be pledged as collateral as needed.
Lastly, just like a home, permanent insurance may provide a reverse mortgage in later years, a permanent life insurance policy can supply supplemental income in the late years as well. There are a variety of sophisticated ways to utilize permanent insurance while still living.
Another advantage of these conversations with young and healthy clients is the benefit that pricing is based on their age and health. Get that rental insurance for a twenty- or thirty-year-old but look at permanent as soon as possible. If we can put a permanent plan in place for a young 40-year-old, their pricing will be reasonable and ideally designed that they can stop paying on the plan within twenty to twenty-five years- just in time to retire. This plan, like their home, will be paid up and they will have it for as long as they need it. They can also use it as they desire in later years to optimize cash value in the plan they own.
I would argue, it is not about term versus permanent; it is about providing the coverage you can afford at the specific time. The key is supplying insurance coverage that will pay off when needed and understanding that those needs change as a person progresses through their life.
So, what’s the plan?
Many financial advisors over the years have used the industry cliche, buy term and invest the difference. Unfortunately, the invested difference was not able to bridge the gap of what was ultimately needed and what was available. There is where insurance becomes an essential part of planning especially in later years.
Far too many advisors talk about plans and push clients to this idea that there will be a simple and happy ending. The lyrics of John Lennon’s “Beautiful Boy” contain the famous Allen Saunders 1957 Readers Digest quote: “Life is what happens to you while you’re busy making other plans”.
A plan is just that. A plan. If your clients have no life insurance, then their plan has no protection! Should the primary income-earner die or become disabled, those they support or care for will be left to wing it and pray.
A good plan protects from all possibilities. With the correct use of insurance clients can rest easy knowing that they are working with their advisor on a bright future. However, with a full spectrum plan, if things take a turn for the worst, they know their loved ones are protected and their lifestyle can be maintained.
Let’s get personal.
My father was a physician, and he had five children. At the age of 49, he had a massive heart attack. He survived, and fortunately, he had a disability policy to provide income while he recovered.
He had term insurance and some permanent insurance. He converted some of the term insurance to permanent, but not all. The carrier (remember the landlord analogy) would not let him.
His term insurance had eventually expired, and what remained was several hundred thousand dollars in permanent coverage.
He passed away at 86. There was no term insurance, but there was enough permanent to take care of my mother for another nine years. The permanent policy paid for my mother’s live-in help and hospice care. She was able to remain in their home until the day she passed because of the permanent insurance.
Here is another life example in which term insurance worked.
I had a high school friend who became a doctor. He was already married with two small children. His wife had recently stopped working because she was pregnant with their third child.
My friend was concerned and knew he needed some financial protection for his young growing family. His budget was limited. At the time, he was able to qualify for $1.2 million of term insurance. We selected ten years of coverage.
As life would have it, my friend volunteered for the Flying Doctors of Mercer program. Today, I believe, it is known as Doctors without Borders. His plane crashed on his flight to Mexico. He and his wife had two children under the age of 5, with another child due in 3 months.
Fortunately, there was $1.2 million in personal insurance and another $200,000 through the hospital group plan. All of the coverage was term insurance, and at that point in their financially strapped lives, that was the appropriate selection. Luckily my friend had a plan that provided protection for his family.
No battle. Different divisions.
So, is it a battle of term versus permanent? Certainly not. It is term and permanent, together, in different divisions.
Think of term and permanent insurance as the brick and mortar needed to build your financial house. You would not build a house out of brick and not use mortar, correct? So why would you build your financial house that way?
Where can I find an insurance expert?
There is good news! EMG Insurance Brokerage is a full-service brokerage company based in Houston, Texas, with a sales office in Austin, Texas. Since 1987, we have been assisting financial advisors and independent insurance professionals in all 50 states. We provide risk protection through personalized client solutions, solving a variety of concerns for individuals and businesses. Advisors and clients need to have access to quality products, expert advice, and cost-effective solutions. We keep ahead of markets, trends and continually update our carrier offerings. Please reach out to EMG Insurance Brokerage today for guidance; we are here for you.
Durr H. Sexton, CLU
EMG Insurance Brokerage