The simple answer to this question is that people buy permanent insurance when they want the best value possible. In the world of life insurance, the lowest net cost means the best value. Those people who can afford higher premiums in the early years will be infinitely better off, in terms of cost, with a permanent form of life insurance. Term life insurance has low entry premiums. It is temporary insurance and it is priced accordingly. Because it has low entry premiums, it is easy to sell. The Term-ites (inside joke about term only salespeople) attempt to commoditize the product so it can be easily sold online without a professional’s help. They can be somewhat cultish about why they believe term is better, all the time, for everyone. Some life insurance companies have carved out a niche as term only carriers because term insurance has its place in the market. It is often the right choice for buy-sell agreement funding, short term loans and young families with limited financial resources.
Permanent life insurance, which is often referred to as whole life insurance, offers much better value for life insurance buyers who want lifetime coverage and can afford higher premiums. Comparing the net cost of permanent life insurance to to the net cost of term insurance is the right way to measure its superior value. Using the simple definition of net cost to be the total premiums paid minus total cash value, the goal of switching from term insurance to permanent insurance is an important step to take in optimal life insurance planning.
What is the difference between term insurance and permanent life insurance?
The out of pocket cost for permanent coverage is initially more than temporary 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 temporary insurance. Term premiums increase as we get older and when we have to renew. When the temporary insurance expires, people often find themselves without coverage when it is needed most.
People buy permanent life insurance once its superior 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 young families unable to buy anything but term coverage and we applaud them for doing so. 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 more than 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 need 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.
Some others are:
- Asset values can fluctuate significantly.
- 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 and inexpensive.
- Premium Financing. HNW people have the ability to finance life insurance. When it makes sense, it is a very effective tool to create tax free wealth.
High Net Worth people own life insurance to reinforce their succession plans. In these cases, 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.