The debate will probably continue well past me and all of those joined in the discussion at this time. Is term life insurance an appropriate financial planning tool? The debate used to be term insurance versus whole life insurance. Then came universal life insurance with its’ own spin on cash value and the debate diverted to what I think was a more key issue debate, term life versus cash value life insurance.
As the debate went on the price of permanent insurance grew and people turned to term life insurance just to keep their budget intact. Now some permanent insurance no longer uses cash value as its’ only support mechanism. With the advent of external guarantee no lapse universal life, we have finally arrived at a place where we can sanely investigate a term/permanent combination that doesn’t just enrich agents and companies. Along with the changes that made permanent insurance more affordable came longer term lengths. The maximum used to be 20 years to lock in a level premium and death benefit. That changed to 30 years and in the last few years a few companies have started offering term life insurance for 35 and 40 years. That has made term insurance for a 30 year old a practical tool for covering income replacement.
But let’s start with term and put to rest some of the arguments about whether it can be a prudent, valuable planning tool. There won’t be any shock to anyone that follows this blog when I say that 95% of all life insurance needs can be fully met and fulfilled by term life insurance. It is comparatively inexpensive when held up next to whole life insurance or traditional cash value universal life insurance. It truly reflects an appropriate way to cover temporary life insurance needs, the vast majority of necessary life insurance. Because of the low cost it allows people to carry appropriate amounts of life insurance without breaking the budget. I have often referred back to clients of mine who came to me, a young couple with children, carrying $150,000 of whole life insurance each and borderline straining their budget to handle it.
One of the great things about term life insurance is the ability of young families to carry enough life insurance to truly do the job it was meant to do. Replacement of income can’t be overstated as the primary need for young families. Even though their lives will have been rocked, a young family can carry on and not lose anything if there is adequate life insurance. Just having the assurance that, at least financially, life will go on without missing a beat is what life insurance is all about. When a family can’t carry sufficient life insurance because the cost is inflated by needless cash value, it puts the family future in question.
Another great thing about term life insurance is the flexibility to address
more than one need without overpaying for insurance. The second problem with permanent insurance is that not only are most life insurance needs less than permanent, but they are also different in length. What really doesn’t make sense is if I have the following life insurance needs, 1. A thirty year mortgage for $200,000 2. Children that are two and four years old and 3. 9 years left on a 10 year second mortgage for $50,000. My longest need is 30 years, but putting all of those needs under a 30 year term means I am paying more than I need to for 2 and 3. If the total amount I decide I need is $750,000 and I buy a 30 year term at age 40 the cost would be about $80 a month. If you broke it out to $200,000 of 30 year for #1 ($25) plus #2 $500,000 for 20 years ($30) and #3 $50,000 of 10 year term ($7). So for $62 you can cover the needs with the appropriate amount and term (called layering), saving money and also allowing you the flexibility of dropping a policy if the need goes away early.
If you do have a permanent need, say final expense life insurance or estate tax life insurance, or a special needs child that you will be caring for, I recommend you steer clear of cash value and buy a no lapse guarantee UL. Keep in mind that your goal, with reputable companies, should be to cover all of your life insurance needs with as little impact on your budget as possible.
Bottom line. What’s so great about term life insurance? Flexibility and affordability. It pays the same death benefit as far more expensive cash value policies. It is simply the right choice almost every time.