In my 30 plus years in the life insurance business, the topic of whole life vs. term life insurance has been debated at length among agents, consumers and media financial advice givers. The problem with much of the advice given today is that it’s outdated. The old rules regarding life insurance no longer apply.
Recently I spoke with an 82 year old man who requested a quote for term life insurance. He had a term policy that was expiring in a couple years and was hoping he could get a decent rate on a new term life insurance policy. He had followed the advice of a well known “expert” and purchased 10 year term insurance and now he is regretting it. At age 82, his options are vastly limited. His insurability is now in question after a prostate cancer diagnosis. He also outlived the conversion option on his term life insurance policy so he missed the opportunity to get permanent coverage without having to qualify medically.
Had he spoken to me 8 years ago when he purchased the term policy I would have suggested he look at a guaranteed premium universal life policy as these policies are priced better than term insurance for most people over 65 and can guarantee a rate to age 90, 95, 100, or 120. If the so called “expert” had really done their homework they would have offered this as an option instead of making blanket statements that everyone should only get a certain type of policy 100% of the time.
So what is the difference between term life insurance and permanent life insurance?
Term life insurance guarantees your rate will stay the same for a certain number of years. You can typically lock in a rate on a term life insurance policy for 10, 15, 20, 25, or 30 years. At the end of the term period the renewal rate jumps significantly. For example, a 40 year old male in great health that takes out $500,000 20 year term policy can expect to pay around $350 per year. On the 21st year renewal the premium will jump to over $8000 per year and will increase every year after that. If he is still insurable he can try to qualify for a new 20 year term policy for $2500 per year if he is in perfect health. I can tell you from experience that most 60 year old men are not in perfect health so more than likely the rate will be over $4000 per year. If he is not insurable and has a conversion option on his term life insurance policy he can convert all or a portion of his coverage to a permanent policy. This option varies from company to company and there are only a few life insurance companies that offer competitive conversion options on their term life insurance policies.
Whole life insurance is the oldest and typically the most expensive type of permanent life insurance. Whole life insurance guarantees that your premiums remain the same during your lifetime and builds a cash value that can be borrowed from the policy or received if you cancel the policy. It typically takes 3 years or more to see any cash value build up in a whole life policy. In my opinion whole life insurance is not the best way to buy permanent life insurance. Even if it pay “dividends” these policies are priced 20-30% higher that other forms of permanent policies so if the agent brags about the policy paying a 7% “dividend” please understand they are only giving you some of the money they overcharged you in the first place.
Other forms of permanent life insurance are universal life, indexed universal life, and variable universal life. Universal life insurance can be purchased with or without a guarantee premium rider and offers a fixed interest rate for the cash value. The guarantee premium rider will lock in the premium for a certain number of years or for life. A universal life policy with a guaranteed premium rider is typically 20-30% cheaper than a whole life policy. Indexed universal life just adds more choice to the savings element of the policy. Indexed universal life allows you to allocate premiums to accounts that pay interest rates related to stock market performance without any of the downside risk if the market crashes. An indexed universal life policy is the best way to purchase permanent life insurance in my opinion. You can lock in the premium for life for a much lower premium than a whole life policy and still accumulate cash value on tax favored basis. Some plans even offer no cost loans or withdrawal provisions that be an excellent way to supplement a retirement or build a college fund.
Variable universal life insurance invests the cash value in mutual funds instead of a fixed or indexed account. The problems with VUL are numerous. First and foremost the cash value is tied to mutual funds that do not provide any guarantees. If the market goes south so can your policy. If this happens when you get older the cost of keeping the policy may cause you to have to make additional premium payments to keep the policy in force. I have seen this happen many times and it is never a pretty picture.
What I recommend people do is assess how much coverage they need and for how long. If you have a young family and limited budget, buying a large amount of term insurance with a good conversion option is the best way to go. Needs will vary but ten times your annual income and covering a mortgage are good guidelines for life insurance needs. If your budget allows, purchase some indexed universal life so you will have something in place that is affordable when the term insurance runs out. You will also have some cash building that can come in handy down the road. For people in the 20-50 age range the typical mix is 80/20 or 90/10 term to permanent coverage.
If you are in the 50-70’s age group, compare the cost of buying term insurance to fixed universal life with a premium guarantee rider, especially if you are in your 70’s. Most companies stop offering competitive term rates in that age group so the UL products start looking like a better option.
You can get a quote for both term and whole life insurance right here. Or you can call 866-365-6558 and I will be glad to answer any questions you might have.
Bob Deighton, President, Deighton Financial Services LLC