Read Before Buying Life Insurance-Term vs. Permanent

Nicholas Lamb
Sep 4, 2018 · 4 min read

There are individuals that work at a large firm that you all know (I won’t name here because there are many good people at this firm too) who operate under the guise of being financial advisors but are in reality salesman pushing permanent life insurance policies. Everyone knows this household company and most have probably been through their permanent life insurance pitch already.

I come across this way too often and it’s pretty disheartening. The purpose of this article is to educate you on the differences between term and permanent life insurance. The long and short is stay away from permanent life insurance and buy a low cost term policy. This will probably create some backlash, mainly from individuals that make their living selling permanent life insurance policies. I am a full service financial advisor that handles finances for individuals and their families which includes investments and insurance. My point is that I can sell you a very expensive (huge commission) permanent life insurance policy but I won’t unless you are in a very rare circumstance where it makes sense. I won’t sell one to you because it is not in your best interest, only mine and the big commission that I take home. By and large a term policy is going to better serve you and your family. Let’s first dive into the basics what they are…

Term Policy

These are not pushed by sales people because the commissions are very low. The sad part is that 99% of people should buy a term policy instead of permanent. You pay a monthly premium for life insurance for a certain period of time. For instance, you might pay $50 per month for $500,000 of life insurance for 30 years. If you live past 30 years, congrats you are still alive and the policy lapses. If you die before the 30 year term ends, your beneficiary’s will get $500,000 tax free. The downside is that if you die after the term, your beneficiaries get nothing and the policy doesn’t build cash value. The benefit is that the premiums are dirt cheap for a lot of coverage. A permanent life insurance policy premium is going to be 10–20x higher for the same death benefit. So for the same $500,000 coverage, it could cost you $500-$1,000 per month.

The idea behind a term policy is that you only need life insurance coverage for a certain period of time. Someone with a young family or mortgage will want life insurance so their spouse and or children do not struggle if they die prematurely. That same person does not (or should not) need life insurance when they are in their 60s because the home is mostly paid off and your earning years are almost over and retirement is near. The point is your family doesn’t need the coverage at that point so there is no need to pay for it.

Permanent Life Insurance

These policies are very commonly pushed by sales people because the commissions are huge. The policies are very expensive vs. term policies as discussed in the previous section. The reason is that these policies never lapse. If you die at any time, even if you are 90 years old, your heirs will receive the death benefit. Additionally, the policy gains cash value over time that you can access in the future. The cash value has a tax deferral benefit as well — meaning it grows tax free (similar to a 401k). The downside is that the cash value will not grow as fast as if the same amount was invested in the stock market. After all, an insurance company is just an investment firm. They are taking your premiums, investing in the markets, talking a big cut in the form of fees, and then increasing the “cash value” of your policy by that amount.

When these policies start to make sense is when you believe your estate will be above the estate tax threshold, which is currently above $10 million per individual. Life insurance benefits are tax free, so the death benefit is a way to give money to your heirs without having to give Uncle Sam his cut in the form of estate taxes. If your estate is less than $10 million, you will not pay an estate tax so that benefit is meaningless to you. Other than that, the instances where these policies make sense is for someone who already has substantial savings and makes several hundred thousand dollars per year. Even then, the argument for these policies is flawed at best. The bottom line is the average person should not buy a permanent life policy.

Recommendation

Buy a low cost term policy and invest the difference. If you need life insurance, buy a term policy that fits your needs and invest the savings you have from not doing the permanent policy. All the number geeks agree that this will have you with more money at the end of the day.

There is nothing we can’t do with investments that won’t outperform whatever “savings” or “investment” characteristics that permanent policies claim to have. The fees are so high in these policies that the cash value of your policy will underperform an investment in stocks and bonds. I’m sure there will be permanent policy salesman that swear by them and will have a very slick sales pitch. Everyone has to make their own decision, but if someone that can sell you a permanent policy (that’s me) says he won’t, that should be all you need to know.

Please reach out with questions and to get on my email distribution list.

-Nick Lamb, CFA

Nicholas.s.lamb@gmail.com

(949) 689–7270

    Nicholas Lamb

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