The argument of term versus permanent insurance has raged on since before I first got into the business in 1978. Back then the defining lines between the two were more stark, with the only term product available being a yearly renewable term, a product with a low initial cost that went up every year until it was no longer cost effective.
Today the yearly renewable term policy is largely ignored with the advent of longer term guarantees ranging from 10 to 30 years. The reality is that with the introduction of the universal life with a no lapse guarantee, a cashless UL, term insurance to age 100 is now available, just under another name. At the risk of pointing out that Americans are not at the cutting edge of everything, term to age 100 has been available for some time outside of the US.
So the question of whether term insurance is just a cheap way out for those that want life insurance but don’t want to pay whole life prices, rises to the surface. There’s no doubt the term insurance is less expensive, but the crucial question for both the insured and the agent has to be whether term insurance meets the need.
I’ve maintained, since longer terms became available, that term insurance isn’t just a viable alternative to whole life, but in almost all cases it is the more appropriate product. First let’s dispel with the whole life argument that a policy building cash value is a good thing. I had one whole life agent point out to me that without the cash from his whole life policies, Walt Disney would have never been able to get Disneyland off the ground. Well that was then and term life insurance wasn’t available.
I suspect that Walt Disney today would think long and hard about the lower payments he could make on term insurance and the fact that those lower payments would free up immediate cash versus waiting for his policies to build cash value.
Almost all life insurance needs are temporary whether the whole life companies want to admit that or not. Dependent children, in almost all cases, are only dependent until they reach adulthood. Banks don’t make loans for life, but rather for certain periods. Retirement and the need to replace income don’t last until age 100, but rather come to an end generally in our 60’s and 70’s. Even with retirement age increasing due to economic forces, term insurance guaranteed into your 80’s is available.
Bottom line. Term insurance is not just a cheap way out. It’s the smart choice in almost all cases. On the flip side, I would argue that whole life insurance is the wrong choice in virtually all personal insurance portfolios.
My 20 years of experience give me the knowledge and leverage to find reasonably-priced life insurance for people who have been declined or are paying more than they need to.
Like you, I also find it hard to find situations where whole life insurance is the best product.
The only thing I can really come up with is if someone wants to make sure that the finances are available to meet their final expenses. For example if someone wants to have $X for their funeral and leave $Y to each child then whole life insurance may be the way to fund that and not rely on savings or an estate that might be withered away by long term care expenses or other debts and bills.
I also look to risk tolerance. If someone does not want to risk the fact that a life insurance need may arise in the future and they may not qualify for affordable rates due to their age or health. I kind of take the attitude that you’ll go broke trying to cover every risk, but you can’t argue with someone’s risk tolerance. Kind of like when people feel more comfortable earning 3% on a CD in the bank versus investing in riskier investments with more returns. Obviously you have a really good chance to earn a lot more investing in stocks and bonds, but there is a risk of losing your principal that some people just aren’t comfortable with.
Those folks with risk tolerance questions should be looking to universal life with a no lapse guarantee, a cashless fully guaranteed product, rather than whole life. As always I appreciate your input. I just think you’re wrong on this one.
Ed, as usual, I am in agreement with you regarding the need for life insurance, and the use of term life vs. whole life in almost all cases.
Having been an insurance agent, I purchased a term life to 65 plan and a much smaller whole life plan at the birth of my first child.
Now, looking back, I realize the premiums used for the small amount of whole life could have purchased shares in a no-load index fund over that same time-frame and been worth much more than the life insurance and cash value within that policy.