Term Life Insurance: The Wrong Fit for Most Families
When shopping for life insurance, it’s hard to ignore the seemingly overwhelming logic that buying term life insurance is the best way to insure oneself, given its relative low cost in comparison to its alternatives. Is Term Life Insurance the best deal though? Most people understand that you get what you pay for. If I owned a grocery store that sold boxes of cereal that were half the price of other grocery stores, people would take notice and likely stock up on cereal at my store. But if I told people that 98% of the time, when you get that box of cereal home, there wasn’t anything in it, no cereal at all, would people still buy?
There are dozens of national, well marketed websites that promote quick applications for low-cost term life insurance from top insurers. Most don’t even offer whole life or universal life insurance as options. Why is that? Do people just not need to consider permanent life insurance? One reason is that they, the brokerage, get paid higher commissions to sell term life insurance. Insurers benefit a great deal more from people buying term life policies that clients are likely to outlive, so they compensate agents who sell those plans. But primarily, it’s the price. People are always looking for a good deal and want to get as much coverage as they can afford, get as much bang for buck as they can. It’s just easier to sell a term life plan than take the time to educate a potential buyer, who with the full picture would likely buy something else if provided the right prospective.
Inside the numbers.
Take the average 50 year old male non-smoker who’s looking to buy $250,000 of life insurance. With the use of one of the online sites or a local broker, this 50 year old would likely be lead to buy a 20 year term policy. If quoted online, the nearly unachievable rate (Preferred Best rate) of $45-50/month would be quoted initially and the average healthy applicant would end up being offered a plan at $75-90/month. Let’s assume this 50 year old accepts a 20 year policy at the monthly rate of $80 (among the best rates for an A rated company). What exactly does that plan do for him?
Term Life Insurance
Term life insurance, at its best, is a wager, a bet for or against yourself. Over the next 20 years, this 50 year old man will pay out $19,200 as a safety net against the risk of him passing away before the age of 70. Live one day over 20 years and the plan is virtually useless. Obviously, dying between the ages of 50 and 70 is possible but not highly likely and the most probable outcome (over a 90% chance) is a $19,000 donation to the insurance company relief fund broken up into small $80 payments with no gain for him or his family.
Universal life insurance
To offer an alternative, consider Universal Life insurance. Universal life insurance, known also as Flexible Premium life insurance, is a permanent life policy that offers flexibility (you can change it as you go), a death benefit that can stay in place no matter how old you get and even has cash value growth, so you accrue an asset beyond the death benefit. For my clients, what I want to accomplish is this; if you’re going to spend money on life insurance, buy something that will benefit your family no matter what while still managing to be affordable. Let’s compare the numbers.
Without getting too deep into the specifics, Universal Life affords clients the ability to design the plan for a specific number of years, but then add years later without having to re-qualify. I generally recommend a Universal Life policy be designed to run to a little beyond the average lifespan (so to approximately 85 years old or so). In that case, unless you live beyond 85, you won’t have to readjust your premium during your life but if you do, it will still be manageable to do so. Designing the plan to run to say age 100 or beyond would be over-insuring in most cases because very few people live to be that old and therefore the extra premium needed to run that long may be wasted. Use the flexibility of the product and redesign the plan later in life.
For the 50 year old, a well-priced Universal Life plan for $250,000 would run about $145/month, so yes about $65/month more than the term policy. But at age 70, how do the plans compare? Over the 1st 20 years of the Universal Life plan, the 50 year old would have paid $34,800 in premiums, but would have accrued about $19,000 in cash value that could be withdrawn at age 70. So, the real cost over the 20 years was only $15,800, or $3400 LESS than the term life insurance.
Which is right for you?
Now, I know the plan is harder to fit in the budget, but I encourage my clients to look beyond the premiums, or the cash value and decide what they’re really trying to accomplish. In most cases getting a little less of the right type of insurance is still a better alternative to wasting your money altogether. Do you want a product that has less than a 2% chance of financially benefiting you and your family? Or let’s imagine this 50 year old takes my advice and keeps his $250,000 of Universal Life insurance in force until he dies at the age of 85. He will have paid about $60,000 in payments, but would leave his family a $250,000 tax free benefit. That’s a 416% return and tax-free to boot.
For that reason, the pure facts that Universal Life is both lower cost over a lifetime and that it will ultimately pay out, even for those who live beyond the average lifespan age is why it is the best fit for most families. Term life insurance has its uses, but everyone should consider building their life insurance portfolio around the core of a good Universal Life plan from a top insurer. Term plans are good as supplemental coverage, added to increase your overall coverage during your working years, but not as the entirety or foundation of your protection.
Life insurance companies love it when people rely on work provided term life plans, or individually purchased term policies only to discover when they retire that they’ve outlived their protection or can’t keep their work coverage. Those people end up uninsured. Proper planning, particularly in your working years, allows people to reap the benefits of life insurance, as it was intended.
If you wait too long, or get the wrong advice, your family is the one that ends up paying.
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