Permanent life insurance offers much better value when comparing its net cost to the net cost of term insurance. Using the simple definition of net cost to be total premiums paid minus total cash value, switching out of a term into universal life or whole life, is an important step to take in order to save money on life insurance.
What is the difference between term insurance and permanent life insurance?
The out of pocket cost of permanent coverage is initially more than term insurance. It is this fact that conditions people to believe that permanent life insurance is better value, when it clearly, is not. Permanent life insurance is better value for anyone considering coverage for life. Term insurance is the ideal name for insurance that only covers a specified period of time.
Term life insurance is like musical chairs. The music goes faster and faster in musical chairs as the game progresses. Term insurance premiums increase as the game progresses, at the times you need to renew. As we get older, the term expires and you may find yourself without coverage when you need it most. Either your health changes or term insurance becomes unavailable, closer to life expectancy.
People only buy permanent life insurance when its value has been properly presented. “But Dave Ramsey and Suze Orman don’t like permanent life insurance”. That is true, they don’t. Neither of them are insurance professionals and neither one counsels individuals. Their target audiences are cash strapped young people without the current financial means to purchase anything but term life insurance. Neither Ramsey nor Orman will ever accept our debate invitations about permanent life insurance. It would make for good TV and Radio, but they won’t. Their job is to sell ads and one way to do that is by making indefensible claims about popular products.
Buying term insurance may be the right decision for families with no other life insurance and who are unable to afford anything other than term coverage. They made a good decision to secure the protection for their family. Buying life insurance is a building process.
When we move out of the “paycheck to paycheck” lifestyle, we become potential permanent life insurance buyers. Since ninety seven percent of ALL term policies do not pay a claim, then 97 percent of ALL term premium are wasted. High Net Worth (HNW) consumers and high income earners choose permanent life insurance for many different reasons:
Income Replacement: If your family or business depends on your income, regardless of your age, life insurance guarantees no family disruption due to loss of income.
Immediate Liquidity: Very wealthy people own life insurance. They want GUARANTEED LIQUIDITY at death and they purchase only permanent insurance because it’s guaranteed for life.
- The value of their assets can fluctuate significantly.
- Many people have children working in a family business. Life insurance is the great equalizer for those children who do not work in the business. Without liquidity in these cases, there is great risk to a smooth succession of the business.
- Many clients own a life insurance policy for each of their grandchildren. The insurance policy is straightforward, inexpensive and a “feel good” asset knowing how it will impact each grandchild.
- Premium Financing. Wealthy people have the ability to finance life insurance. When it makes sense, it is a very effective tool to create tax free wealth.
Wealthy people also own life insurance to support their succession plans. In these cases, their assets may be real estate, businesses and other non-liquid assets. Life insurance provides immediate, tax free liquidity. It gives the family and their advisors time to properly execute the succession plan. Too many times, without sufficient liquidity, anxiety creeps in and family members get nervous. This can lead to litigation, confusion and disruption.
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Also published on Medium.