“Why Buy Permanent Life Insurance? Part I” is the first half of a two-part series of guest posts by insurance expert Glenn Cooke.Glenn has written about various insurance topics, including permanent life insurance, for Gail Vaz-Oxlade’s blog (among many other well-known sites). He recently contributed to this book. Comment with your questions about permanent life insurance cause he’s the guy to ask! |
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Readers of this blog may recall when Joe threw down the gauntlet in this post: Buy Term Life Insurance.
Here’s what he said:
If whole life is such a great deal for me, then an insurance broker needs to explain to me why I should accept vastly lower returns on my money for decades with whole life insurance, when I could spend pennies on the dollar to get similar coverage through term insurance.
I’d like to respond to that. But before I do that, there’s a few assumptions in the above quote that I’d like to clarify.
First, Joe mentions whole life insurance. Many consumers understand that there are two types of life insurance, term and whole life. This is not the case – the two types are term and permanent life insurance, and whole life is one of three distinct types of permanent. I’m going to define what those three types of life insurance are below.
Joe also mentioned getting pennies on the dollar as being a reason not to get permanent life insurance. This is correct. Your basic rule of thumb should be to never mix investments and life insurance. So why would you purchase permanent life insurance,such as whole life?
Let me answer that by asking a question – why would you buy term life insurance? Joe said:
The purpose of life insurance is to ensure that your family unit can continue to operate comfortably if a death results in the loss of an income or other significant support.
Let’s be clear here – once Joe’s dead, he’s not financially responsible for anyone. He can’t be – he’s dead. Joe’s buying life insurance out of an emotional obligation that he needs to support his family should he die. And what’s the least expensive way to address Joe’s emotional decision? That’d be term life insurance.
Now lets say that due to my upbringing and culture that not only do I want to look after my family should I die young, but I actually want to leave behind an estate WHEN I die – even if that’s when I’m 90. One of the least expensive ways to address this is permanent life insurance – insurance we buy that locks in premiums level for the rest of our life. Proving that this is the least expensive way over the long term is beyond the scope of the article, so lets just assume this is the case.
The underlying assumption made by many people is that term insurance is mechanically and factually correct. That may be – but it’s only that way after you make the emotional decision to look after your family after your death and then restrict that obligation to your income earning years. Someone deciding they want to provide an estate to their family after their income earning is just as valid of an emotional decision, and in that case permanent life insurance is the best choice. In fact, the fit for term life insurance is a somewhat unique to western culture. There’s plenty of places where the idea of life insurance that disappears just as you’re getting older would be treated with ridicule.
And that’s your answer Joe. Why would you buy term life insurance? Because it’s the best way to answer your emotional need to look after your family during your income earning years. Why would you purchase permanent life insurance? Because it’s the best way to answer your emotional decision to provide an estate to your family no matter when you die. Both are valid solutions to differing emotional decisions. And they’re all as valid as the people who decide they have no obligation to anyone after they die and as a result don’t purchase life insurance at all.
I’ll leave you with this parting thought based on my experience in the life insurance industry. Generally speaking when we’re young and healthy people want term life insurance. When folks start getting old and unhealthy – and that’s going to happen to all of us in varying degrees – many people decide that they just want to leave a bit of cash behind even if they’ve become self insured. I expect you can see how this could happen – just fast forward until you’re 70 years old. Is it possible that you might decide you’d just like to leave $50,000 behind to each of the grandkids? Or an easy $25,000 just to have cash on hand to pay for final expenses? Once you see that this change in thinking as we get older is possible, it should also be clear that term insurance just won’t solve that problem. And while we can determine that this approach may not be for us, I would suggest that this emotional decision is as valid as any we might make ourselves.
In next week’s Part 2, I’ll define and clarify the different types of permanent life insurance including whole life insurance.
Glenn Cooke is a president of www.LifeInsuranceCanada.com and a Canadian life insurance broker. While most of his clients have term life insurance, some have permanent life insurance. Glenn himself owns a broad mix of both term and permanent life insurance policies.
I like the sounds of a mixed basket of insurance. Second half should be good!
I look forward now to reading Part 2, where the different types of permanent life insurance are explained – and that’s NOT something I ever thought I’d say.
But how I wish there was a guide to the general principles of the underwriting process! Having gone through the process to obtain a life insurance quote (medical questionnaire, exam, etc.), I was left scratching my head once I got the number – their assessment of risk mystified me. But enough about me, hah!
Great post!
A well-explained article! Thanks for this clarification Glenn! At what age do you think people should start considering getting term or permanent life insurance?
Thanks for your kind words Jack.
It’s not an age thing so much as having a need for cash should you die. The two most common reasons for that are a mortgage and the bank wants you to have insurance to cover their butts, and secondly when folks start having kids. Kids are financially dependent on our income so if we die, insurance can be used as a new income to look after the kids.
Really interesting. It hadn’t even occured to me about not having life insurance. Of course I intend to have a nice little family and will undoubtedly be very determined to provide for them whether I’m dead or not so it makes no difference in my situation. I guess the important thing to realize when pondering life insurance is that you will 99.9% guaranteed die. (.1% held back for those of us that become zombies.)
Without any dependents or a mortgage/debt at this point, I doubt Glenn would recommend that you’d need insurance (although I know he’ll comment if I’m wrong).
I know you’re one of the few people in Canada who’s on board with my “save 50% of your gross” plan for as long as possible so I get the feeling you won’t need permanent insurance to build your estate and, when you do start a family, term will *probably* be the way to go. I’m going to ask Glenn a question re: the cost effectiveness of permanent insurance vs saving to build an estate but I think I’ll save that one for next week.
I’ll offer a teaser – something consumers are mostly unaware of. It’s called lapse supported pricing.
If you want $100,000 when you die, then it makes sense you could either save and invest until you have the $100,000, or you could buy life insurance. Both should be roughly equivalent – the premiums should just be the amount needed to accumulate to that $100K at your time of death.
Except……that’s not what happens with life insurance policies. 10 people might buy a policy and pay into it for 20 years. And then 5 people will cancel their policies. So now the company is actually only paying 5 death benefits, with premiums coming in from more than 5 policies. Thank those people that cancel – the company uses their premiums to lower yours. And that’s why sometimes life insurance is actually less expensive than saving and investing it yourself.
Question: If one plans properly for retirement, shouldn’t term insurance be sufficient for the wage earning years? Assuming that retirement investments are planned with appropriate beneficiaries, it seems like term insurance is the best answer. Thoughts?
It’s simple – if you assume that you will have all the estate you need when you retire, and don’t want to leave anything additional behind, then yes, term is the way to go.
If you do want to leave something behind above and beyond your estate, then permanent life insurance is the way to go.
Neither is right or wrong. As I noted in the article, the first belief is common – most folks will decide they don’t want life insurance when they’re older, and go with term.
There are certain tax situations where permanent life insurance can make sense, but probably not for anyone reading this post. Other than that, listen to Joe and buy term.
As noted in my post, you’re assuming that everyone must follow your beliefs that ‘you don’t want life insurance when you’re older” and also “you need life insurance now”. Neither are quite as firm as is commonly made out by advocates of one type of insurance or another.
if you want insurance during your income earning years and not after that, then term insurance. if you want insurance after your income earning years, then permanent. That’s correct. Assuming that everyone not have/want/need life insurance after their income earning years is incorrect.
Most folks I deal with want term insurance – but not everyone.
And one further comment – the society of actuaries has a motto something like ‘substitute facts for appearances’. Financial bloggers frequently bash permanent life insurance and indicate that term is better/cheaper. But when was the last time a blogger actually checked their numbers?
Consumer advocates and bloggers for example will tell you to ‘buy term and invest the difference’, to become self insured with assets upon retirement. Yet when was the last time a blogger actually checked those numbers to see if they held true? never mind last time, how about ‘ever’?
I have seen the numbers, and they are quite likely not what many think they are. Which is an example of why I contacted Joe to write the articles. Question your assumptions – or the assumptions that are fed to you by the industry or online. And then, demand to see the facts to back it up.
nice defination about permanent life insurance
The way life insurance defined here is really good.
Whole life insurance is a great investment. Whole life is the most common type of permanent life insurance. With whole life insurance, your premium payments remain the same over the life of the policy. You can also choose how often you’d like to make premium payments like monthly, quarterly, semiannually or annually.
While this comment is pretty obviously spam, I have to say that — after clicking through to your site (or the site for which you are broadcasting comments) — the quote tool on “No Med Canada” is super simple. Super quick, doesn’t require excessive personal info, etc.