“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!
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.