Permanent life insurance (sometimes known as whole life insurance) offers much better value for life insurance buyers who can afford to pay higher premiums and capitalize on better net cost. Comparing the net cost of permanent life insurance to the net cost of term insurance is the true measure of determining which type of life insurance costs less over time. The Net cost is the total premiums paid minus the total cash value. For example, if $80,000 of premiums were paid into a policy over 10 years and the cash value of the policy now has $100,000, the net cost would be a net gain of $20,000. The longer you own permanent insurance, the better its net cost will be. With net cost, the lower number is better and net gain means the policy has more cash value than premiums paid. The longer you own term insurance, the worse the net cost will be. Based on this important fact, switching from term insurance to permanent insurance is a necessary step in optimal life insurance planning. Incidentally, there are only two types of life insurance – permanent insurance and term life insurance.
What is the difference between term insurance and permanent life insurance?
Permanent life insurance provides lifetime coverage or to a point in time selected by the policy owner, not the insurance company. Some permanent life insurance policies build equity or cash value in the policy. The out of pocket cost of permanent coverage is more than the out of pocket cost of term insurance. But that is only in the early years. As a result of paying lower premiums in the early years, many people incorrectly assume that term life insurance is “better”. Since the definition of better is not the lowest price, a meaningful disconnect sets in which catches many people off guard.
Permanent life insurance offers far better value for lifetime coverage.
How long does permanent insurance stay inforce? The simple answer is that a permanent policy remains inforce for as long as the policyowner wants to keep it. Term insurance is the ideal name for temporary coverage because it stops at a certain age. It was never intended to compete with permanent coverage. Permanent insurance puts the insurance owner in control of when the coverage ends, not the insurance company. Term life insurance can feel like musical chairs. The music goes faster and faster in musical chairs, just like increasing term premiums as you’re getting older. When a term policy expires, you may find yourself without coverage or options when you need them most.
“Too many people have been sold a theory called “buy term and invest the rest”. They were told they could invest better than insurance companies. The plan was to invest, each year, the difference between the term premium and the higher premium for permanent coverage. This amount would be invested, accumulated and used to pay for escalating term premiums when the term policy expired, later in life. Buy term and invest the difference has proven to be a costly mistake.”
The right prospects always buy permanent life insurance when it is properly presented to them. “What about Dave Ramsey and Suze Orman? They don’t like permanent life insurance”. It’s true, they don’t. But they are not insurance professionals and they do not offer advice to individuals, which would require them to put their reputations on the line. It’s easy for pundits to make general claims for which they have no personal responsibility. Many young families do not have the financial means to purchase anything but term life insurance.
Buying life insurance is a building process, not a one-time event. Term insurance can be the right decision for families without coverage. When is the right time to consider buying permanent insurance? There are several common triggers leading people to consider upgrading:
When moving from the “paycheck to paycheck” lifestyle, we become potential permanent life insurance buyers. Since ninety seven percent (97%) of all term policies do not pay a claim, then 97 percent of ALL term premium were wasted. High Net Worth (HNW) consumers and high income earners choose permanent life insurance because it has better value:
Replacing Your Income: If your family or business indefinitely depends on your income to run smoothly, permanent life insurance is the right product if you can handle the higher premiums.
Immediate Liquidity: Very wealthy people own life insurance. They want the guaranteed liquidity it provides at death and they purchase only permanent insurance for this purpose.
Permanent Life Insurance Solves Succession Planning Problems:
- The value of people’s assets fluctuate significantly and death is always the worst time to sell a business or other assets.
- 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 the grandchildren.
- 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.
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Also published on Medium.