Life insurance - permanent vs. term, and details

In My Humble Opinion
1

I have heard it said that if you expect to be insured for a long period (ie; twenty years or more,) then it makes sense to choose a permanent policy over term insurance. This sounds logical to me.

The insurance salesman that I am dealing with seems to think otherwise. Given my circumstance (income ~$35,000, want life insurance until my baby daughter is self-supporting, already have modest $100,000 life insurance through my employers,) she recommended 20 year term insurance with coverage of $275,000, with monthly a premium of $36, jumping to $320 for the hypothetical next 20 years. (I am 38, a non-smoker, and in good health.)

First question - do you think this a little overcautious in terms of actual need, or am I being stingy/short-sighted? Even if I kick the bucket in five years, this will allow around $21,000/yr, until the kid is twenty and should darned well be out of the house and have her own job. This is practically “worst case scenario,” and her mum has her own income. If I live much past ten years, I start to be worth more dead than alive. (I expect that I’ll be earning more in ten years than I am today, but I don’t want to count any chickens.) Also, in the event of my early demise I wouldn’t expect my wife to go it alone until the kid is out of the house.

Moving on to the second part of my question, I asked the agent to give me a quote on a permanent policy. She offered to quote me on a “blended” policy, with a mix of term & permanent. I have looked it over, but not discussed it with her so far.

What I would like an informed opinion on is this - the particulars of the blended policy look more or less the same in terms of benefits, but looking at the table, the benefit is not clear to me. She quoted $100,000 permanent/$175,000 term.

For the permanent portion, there is a table showing expected annual deposits over a period of 60 years. For the first twenty, it’s straightforward - $860 per year, so $71.67 a month. For the next twenty, the required deposits jump to $3068 per year ($255.67/mo.) Years 41 and 42 have expected deposits of $13,459, or $1121.58/mo,) and after that it drops to $605/yr ($50.42)

The “cash value” of the policy grows steadily from $0 to a very generous $79 over a sixty-year period. It seems to me that the scheduling of very large payments at years 41 and 42 are designed to limit the chances of the policy-holder keeping the policy past the age of eighty, even if I do somehow manage to find a way to pay $255.67 each month for twenty years, out of my retirement income.

I am largely ignorant about insurance products, but this seems to me to be engineered to give the impression that taking a twenty year term policy makes more sense than something “permanent.” I am of two minds about this - because I expect to live at least twenty years, it seems to me that the most likely scenario in taking term insurance is that I pay out $9,000 or so over a couple of decades that I fully expect to flash by in a blink, and get no actual benefit from it. On the other hand, I’m not a complete idiot, and I get that insurance is meant to deal with the unexpected, and that ~$36/mo. is a manageable payment and that there’s value in knowing that my family won’t be impoverished in the (hopefully unlikely) event of my death.

Can someone explain this to me, a little? Does “Permanent Insurance” really make more sense if you expect to be insured for >20 years? I don’t even have a mortgage yet, but my aim is to get something that I can reasonably expect to have paid off before I become too creaky to earn, and to carry enough insurance that my family won’t lose it if I get hit by a bus before the mortage is paid off, so my expectation is that I will want to be insured for twenty years, or a little more. I don’t want to get into a situation where I can’t pay my mortgage because my insurance premium is too high.

2

Full disclosure, before I give my advice:

  1. I was a life-insurance agent for a year.
  2. I was terrible at selling life insurance.

Having said that, the primary function of permanent (or whole-life) insurance is to increase the commission of the selling agent. The biggest advantage to permanent insurance vs. term is that permanent insurance premiums aren’t supposed to increase; once you’ve purchased the insurance, your monthly/quarterly/annual premiums are supposed to stay the same, forevermore.

Which is why I don’t understand the particulars of the blended policy you’re being quoted. The permanent insurance premiums are fluctuating. I can understand the premiums for the term portion going up, but not the permanent premiums.

The cash-value equivalent also seems waaaaaay off. I’ve got whole-life policies on my first three kids; I’ve had them for 11 years now. The cash value of each policy is around $3,000, give or take. Seems to me the cash value of your permanent policy ought to be a LOT more than $79 after 60 years.

My advice would be to buy level term insurance for 20 years. Term insurance gives you the highest coverage for the smallest amount of money, which seems to be what you’re after.

3

Thanks, Sauron - that’s helpful advice.

I set up an app’t for next week to purchase a twenty-year term policy. (With another agent.)

4

Hmmm … one post from a former (unsuccessful) agent and you decide to dump an agent who has spent the time and effort to propose and recommend 20-year term? :dubious:

5

Whole life policies are infamous for their huge fees and it is hard to find anyone other than a salesman earning commission off them who will recommend them. So term seems the way to go. Term policies that I have seen have always been 10 year at a low rate, then jump to a huge rate after 10 years. That seems to be what you are looking at. Make sure you can get out after 10 years - if you are still in good health at that time you will be able to get insurance for much less than $320/year. At age 48 I got $500k coverage for under $60/month for 10 years.

6

It’s more that she seems dishonest. Although I have been persuaded that term insurance does make more sense for me, she didn’t really provide a good faith quote on the product that I was asking for.

The decision wasn’t made on the strength of Sauron’s advice alone, either - I had spoken to another agent in the interim who did give me a quote on a blended policy that did have the attributes that I was asking for , at not much more of a cost than the first quote.

Sauron’s post seemed more-or-less in line with my expectations about what a permanent policy was supposed to be like, and so did the second quote that I received. I suspected that the first agent was blowing smoke up my ass, and this suspicion was reinforced by followup with another agent and with a disinterested party.

That I am going with something substantially similar to her recommendation doesn’t really figure - I prefer to do business with someone who makes an honest effort to provide what I’ve ask them for than with someone who appears to have offered me a sort of Hobson’s choice.

7

Insurance is for insuring. Investments are for investing.

Whole-life or permanent insurance is an attempt by the insurance co to become your investment company too.

If you are too undisciplined to save and invest, but agree that you really need to do it, then perhaps some whole/permanent insurance would be a way for you to pay them to be your backbone. But in general the investment returns suck & the cost is large.

8

Full disclaimer: I am currently a health and life insurance agent in the USA.

The term/perm blend is a screwjob. As a general rule, any time an insurance agent offers you two products to cover one scenario, they’re trying to bump their commission.

The standard advice these days is “Get 10x your annual income if you’re on your own, 20x if you’re married and/or have children.” Why? Because you don’t buy life insurance just to pay for your funeral and for your daughter’s education. You also have it to ensure that when you pass, your family has time to grieve in dignity instead of frantically trying to sell your possessions to make do. You also buy it to insure the income loss.

I, however, don’t like the idea of making insurance a one-size-fits-all thing. Based on what you’ve written (and only that - if you were a client, I would want to talk with you much, much more before making a recommendation), I would recommend the following options:

  1. $400,000, 20-year term, guaranteed renewable.
  2. $250,000, 20-year term, guaranteed renewable, ROP rider.

A ROP (return of premium) rider works like so: if, at the end of your policy term, you’re still alive then you get all of your premiums back. The price is higher, but it allows for a nearly zero-risk scenario. To be fair, I don’t know what insurance company operating in Canada will offer this type of policy - I only work with one ROP company, and that’s ING.

Like LSLGuy said, if you want your insurance company to be your investment company as well, whole life (perm) is the way to go. Exhibit A: AIG, who I thank Og every day that I never wrote a policy with.

No matter which option you choose, if you’re even remotely able to do so then pay your premiums annually rather than monthly. This will lower the agent’s commission, so most will not recommend you do it. But you’ll save a bundle over the course of a year - sometimes, up to 20%. For instance, if you lived in Atlanta, a $400k 20-year term would cost you about $25/month or $285/year if you paid annually. It’s only a $15/5% savings, but it’s something. The gap widens significantly as you get older.

If you’ve not yet made a final decision and you’d like to talk with me about it, feel free to PM me. My insurance knowledge is USA-centric, but I’d be happy to do what I can.

9

Unless there are some unusual circumstances, 10 x annual salary seems rather excessive for someone who is on their own. I suppose I could see it if the insured is carrying a significant amount of debt that is not independently insured, for example, but otherwise, why would anyone need to be carrying that much?

10

Generally, 10x is enough to settle your debt, pay the rest of your mortgage, cover final expense costs, and stuff like that. Lazy agents will leave it at that - better agents will do a full needs analysis and usually come to a somewhat lower number. It’s sort of a CYA thing for both parties - 10x almost universally overestimates what you truly need, and so neither the agent nor the client risk leaving the client under-insured.

Here’s the thing: a full needs analysis (looking at income, cash outflow, debt, etc.) gets pretty personal, and it’s not uncommon to get a client who doesn’t want to share that much detail with me. In those cases, I automatically assume that at least part of that is that they have financial issues that they’d rather not admit to, so I recommend an amount that probably over-insures them to make up for what I suspect they’re not telling me. It’s a safety net on both ends. Perhaps it’s overly cynical of me to think that, but I’d rather my cynicism result in overprotecting my client than the other way around.

You’d also be surprised at the number of people who leave a large portion of their life insurance payouts to charities. It’s rather touching when I get to work with someone who does that.

11

Aside from final expenses, which are generally a small fraction of income, not a multiplier, in your other examples all you are really doing is increasing the amount the heirs will inherit. There is rarely any need for a person with no dependents to have life insurance. If they want to generate money for some purpose, then fine, but there is no need for life insurance.

12

Re-reading my posts, I see where I wasn’t clear. There are several different “niche markets” in term life insurance, one of which is final expense insurance. These are small policies, usually $10-$20k, that are designed to cover the cost of a funeral, burial plot, etc. Then there are the more robust term life plans, such as the $400k policies I was talking about. I don’t do any final expense business, only full term. So, the life insurance clients I work with come from the mindset of “my death can generate a positive financial impact” instead of “for a low price, the managerial aspects of my death can be financially handled.” Since that’s the only type of life insurance client I generally deal with, I may have made a hasty assumption with regards to the OP.

However, I will say this: most final expense policies (the $10k-$20k that cover the costs of burial) aren’t a wise financial investment. Their biggest benefit, to the insurance broker, is that they don’t require a paramedical examination, they’re almost never denied, and they’re paid very, very quickly (2-3 days as opposed to 3-5 months with bigger term life policies). If you’re willing to sit through a paramedical exam (get blood drawn, pee in a cup), you can get MUCH more coverage for the exact same price.

13

Oh, man … One of the most frustrating aspects of my brief career as a life insurance agent was calling on long-established accounts to see if I could answer any questions. Many of these people had life insurance policies they bought back in the 40s. At that time, they were marketed as “burial policies”. They were typically $500, which at the time they were written (60 years ago) would cover the cost of funeral/burial expenses.

I would patiently try to explain to these 80-year-old women that while the policy was called a “burial policy”, the total amount paid would be $500, which isn’t even enough to pay for a low-end casket today. In other words, they were under-insured.

They never believed me; in fact, one woman went so far as to claim I was trying to “frighten” her into buying more insurance from me. I told her I was there as an advisor, not a salesperson; that she would be leaving a financial burden for her daughter upon her death for funeral expenses, and that I didn’t care if she bought insurance from me or from somebody she trusted, but she needed to re-think her stance.

14

At the current rate, I think funeral costs are doubling every twelve or fifteen years. The two most common mistakes people make when they buy life insurance are failing to adjust for inflation and failing to get enough coverage to insure the loss of household income.

16

Another thing to consider that I haven’t seen mentioned is any long term health issues you may have. My wife for example is a Type I diabetic. So the chances of her being able to get an affordable insurance policy 20 years from now at 56 is pretty slim. So we went with the whole life policy with the idea in mind that it’ll pay out until she’s in her 70’s. At which point the house will have been paid off for a long while and the kids will be established in their own lives.

17

The way I (a complete duffer) always understood it was that whole life is a can’t win scenario. The insurance company knows it’s going to have to pay out on you some day, so it charges rates accordingly. With term life, the insurance company only pays if you get unlucky, so it only has to charge enough to cover the payout x the chance of it coming due. Which makes it sort of a win-win. Either you get this huge cash payment worth more than the time-value of what you paid for, OR, as a consolation prize, you live.

–Cliffy