“Permanent-Term Life Insurance”
10/8/06
For almost as long as there has been life insurance, there has been an ongoing debate about whether term life insurance or permanent, cash value life insurance was the best choice for protecting one’s family in the event of a premature death of the breadwinner. Usually, advisors who don’t sell life insurance agreed that term insurance is the best choice since it was inexpensive and allows you to take the difference and invest it in a wide array of investment options free of the restrictions and expenses associated with a cash value policy. In other words, buy term and invest the difference. Advisors who sell life insurance reason that permanent life insurance, whether, universal life, variable life or whole life, forces people to save when they otherwise would not. They also tout the tax-deferred earnings growth that becomes tax-free if you should be so lucky as to die while the policy is in force.
In a sense, both viewpoints are right. If you buy term coverage and invest the difference, you can do so with lower expenses than are embedded in a typical cash value policy. Lower expenses, in the long-term, will usually translate into higher long-term returns. However, many people either lack the discipline to actually invest the difference or do a poor job of investing on their own. In these cases, the forced savings of cash value policies proves to be the superior choice. One of the major drawbacks to term insurance is that once the term runs out, you no longer have coverage. The term insurance policy can be purchased for 5, 10, 15, 20 or 30 years with level premiums for the period selected. Even with the longer time periods, most term insurance will lapse. Obviously, if you are the insured, this is a good thing! However, your family may still need coverage if you have not saved and invested wisely.
Now a new product nicknamed permanent-term life insurance, offers a guaranteed level premium for life that is 20% to 30% less costly than the premiums of the typical cash value policy. The permanent-term policy builds little, if any cash value but is guaranteed to remain in force as long as you continue paying the premiums. This solves the problem of your term policy running out before you do. Furthermore, this product allows you to customize a plan to your specifications. For example, if you want a guaranteed level premium for forty years, you can do this. For comparison purposes, a fifty-year-old male buying $1,000,000 of coverage would pay approximately $15,000 per year (not guaranteed) for a Universal Life policy; $10,000 per year (guaranteed) for a permanent-term policy; and $4,000 per year (guaranteed) for a 30-year level term policy. This product may be a good fit if you want the guarantee that your policy will remain in force regardless of changes to interest rates or mortality rates and you are not concerned with building cash values.