How To Clarify Term vs Permanent Insurance To Pick The Best Coverage

By Oscar Quiroga | Finance Education

Sep 26

Everyone starts learning from a point of ignorance. This applies to things you would most commonly know the most about - your money. However, I found that learning what to do with your money and to safeguard your future and your family's future is another thing entirely.

Why?

Because the financial world kind of wants it that way. If it were simple to invest your hard earned dollars and triple your money no one would profit from it and there is alot to be profited from.

The financial industry is a vastly large and complicated space and it's not important that you try to predict market outcomes or how the market is going to act - no one has the ability to do that.

What is important is that you understand how the financial industries operate and their motives behind financial products. Not everyone is bad and there are alot of people who are good people selling financial products.

But the market's sole function is to earn revenue and profits - that's it. Their second option is what is good for the customer. Sometimes this is a fine line to cross as a financial professional but these are the rules.

Types of Insurance

Why does one need insurance?

I won't really answer that fully but to an extent - everyone needs protection. Answer this question if something happens to you - you become disabled or die - who will you burden?

If the answer is no one, you might be the unfortunate few that this applies to but generally speaking, most everyone will impact someone if their own lives are altered or extinguished.

In this event, covering expenses like medical or death, can make or break some families and having a coverage policy to pay these costs can be the smartest decision a person can make.

Aside from that, you don't need insurance for anything else. This is where things get tricky.

There are 2 types of insurances:

  • Term Insurance
  • Permanent Insurance
TO GET THE COVERAGE YOU NEED, YOUR INSURANCE SHOULD PROVIDE ONLY ONE OUTCOME - PROVIDE DEATH BENEFITS. THAT'S IT.

Yet, you will find professionals selling insurance that has cash values so you can earn and save for your retirement all wrapped into one.

This is not as attractive as one might think unfortunately.

To explain this better, I will advise you watch the following video by Dave Ramsey as he describes to a caller who has this type of insurance what they missed in considering this policy.

Many other insurance providers describe term insurance in the following manner. "Term is temporary insurance at 10, 15, 20, 25, 30 - Level terms. For instance, you can have 10 years of level premiums but in year 11 the premiums jump dramatically.

When the term period expires - the level premium can go up 20x the cost.

Then what do you do? If your health is good you MAY be able to buy another policy.

No guarantee that a new term plan will be available. Even if you can qualify, you can be sure your policy will be considerably more expensive."

This is true to a point. If you buy term insurance it only provides coverage for a certain period of time and you will need to buy or renew your policy but with certain providers you can qualify with no medical exam.

This is how they sell you their version of permanent insurance:

  • "Permanent insurance is designed to last a lifetime. Premiums are designed to be level until you die assuring your family will receive your death benefit.
  • Life insurance is not a win-win proposition. With every policy - you either win or the life insurance company wins.
  • Term is set up to work as long as you die early. In order to win, you have to have a policy that cannot be cancelled by an insurance company before you die, wont expire before you die, and has a predictable affordable level premium that cannot be raised in order to force you out."

What is true is that permanent insurance has a level premium you pay that does not change throughout the lifetime of the policy. Sounds pretty good?

How can an insurance company make money selling this? Well, this is where things, again, get tricky.

Let's look at the costs of both types of insurance:

Term costs: At age 45 - $600 a year x20 (first 20 years) = 12,000 + 14,000 x20 years of coverage bringing you to age 85 for a total of 292,000 dollars of premiums toward a 500,000 death benefit. If you live to age 86 all you have, presumably is 96k of invested funds to live on and no death benefit to cash in.

Permanent insurance would offer the following math: At age 45, same coverage but total investment of only 151,700. You receive 500,000 death benefit if you die.

What is important to note as well is that INVESTMENTS are the key to protection plus retirement savings. This picture of retiring with 96k after losing term insurance coverage at the age of 86 presumes a very poor investment strategy to only end up with the amount determined of 96k.

As you begin to consider your policy coverage you should, at the same time, be well versed in your investment strategy to match what you will need in your retirement years - protection + savings.

This is the math permanent insurance providers like to use to sell their products. Again, you need to understand more about this product.

There is a built in cash savings that incurs costs every time you want to make a withdraw. If you want to live off of the 151,700 investment amount mentioned or take out a withdraw you are essentially taking out a loan on your own money that you have to pay interest on.

Again, refer to the video by Dave Ramsey mentioned earlier for a detailed explanation. Also, check out this video.

Another catchy phrase you will hear permanent insurance providers tell you is this - "Die with your policy in force".

I propose the following and total opposite look on dying. The smarter way to look toward the retirement years is find a way to die with a large enough nest egg and no need for insurance. That is - "die with no policy needs in force."

I hope I was able to shed some light on a complicated topic many pundits spend hours discussing with clients. If you are need of any assistance with your financial planning you can always reach me on this site through chat, by using our Contact Us form, or simply book a consultation on my calendar page.

Stay tuned for more informative and helpful financial and marketing advice on this blog. Follow me on Facebook and Instagram too!

About the Author

I love what I do. I have the chance to work with hard working, driven business leaders and professionals that want to make a difference in this world. I love that. I am a soccer fanatic, a chef un-extraordinaire, musician "on-hold", father of 6, and raving fan of my wife. Live life to it's fullest!

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