Should I buy term life insurance and invest the difference?
by Jerry Ricketts 09/22/2011
If you Google the title of this article or the phrase (buy term and invest the difference) you can read countless opinions as to which type of life insurance is best. The term…”buy term and invest the difference” became very popular during the 1970’s and 80’s.
I could respond to this age old question from my vantage point…a member of an organization who has put in force many billions of life insurance volume…both whole life/universal AND term life insurance over the last 35 years. We manage tens of thousands in California alone. But let’s move on.
Probably, the best way for me to answer this age old question is to give my own person experience.
Having lived right in the middle of this debate my entire adult life what did I decide was best for my family? After all, life insurance was for my surviving family and I didn’t want their dreams to die with my premature death. Today, my kids are raised and living on their own. They have all received university diplomas and a couple of post grad work endeavors in addition. With the cost of tuition today I am a thankful person…but back to the question.
When I first entered the insurance business I was single. What did I purchase? Was it term or whole life? I had studied and learned a lot from very experience agents. My budget was tighter during those early years so I purchased both term and whole life… universal life actually. The majority of that initial purchase was term.
A year later I was married and we had 4 kids within 7 years…crazy I know but worth it. During those years I converted some of that term insurance to more permanent insurance (universal life). (I did this because I had received calls at the office from clients and potential clients who were in their later 50’s and the purchase of term insurance at these advanced ages was cost prohibitive. In addition, many of these people had either health issues, renewal term rates that were 10 times the original premium or simply didn’t have any renewal options at all. Most of these people hadn’t invested “the difference” when they purchased their term insurance years earlier. I never forgot some of those conversations and some of these guys were in their second marriages with a second family and they needed insurance into their 60’s and beyond).
I also purchased additional term policies (two) to insure that if I had died during this time my kids would have the opportunity to graduate university. In addition, I purchased both permanent and term insurance on my wife. I knew I was in big trouble if she was to have died. We were in our early 30’s and I wanted to be prepared for our later years.
During our mid to later 40’s (with budgets not as tight) we purchased larger permanent polices knowing that our term policies (three of them) would begin lapsing over the next 10 to 15 years. Term polices are cheaper because they are designed to “lapse” before you die. (I had a vice president from a well know insurance company in my office years ago who said simply…” our term policies only pay out 2% of the time that’s why they are so inexpensive”). That was okay with me as I understood “mortality tables”.
Fast forward to today. (My wife still puts up with me and for that I am thankful). We are both in our late 50’s and that third and final term policy has finally lapsed. It fulfilled a specific purpose of providing the money needed for each of us if we would have died during this time. The good news is that we are still here and what are left are two permanent UL policies (one each) that the insurance company will pay someday as a future death benefit. The option to lower the insurance face amount would also lower our premiums if need be.
In addition, in the event that either one of us develops a chronic illness/condition or is diagnosed with a terminal illness this permanent life insurance money is available to help with the any costs associated with providing the long term care as needed during our life.
So there you have it! If you will allow me, I would like to share more from my professional experience for a moment. This debate is important but the bottom line is providing money to clients when they need it most. I have talked to teenagers who just lost BOTH parents (clients) in a car accident. I talked to clients who knew that they had months to live but were comforted knowing we would be there with a check. I have talked to people with new health conditions who wished they would have bought life insurance but regrettably didn’t. About 15 years ago, a senior vice president of a top 5 insurance company told me over dinner that to expect my death claims paying experience to increase dramatically in the near future. I had no idea at the time what that would mean to me personally. Every month now, I see multiple death claims being paid to our surviving clients spouses. Life insurance money now available to pay off the home or replace lost income.
My advice: a blend of term (to cover specific needs) and permanent life insurance to cover needs that never go away. In all reality, you really should look at your life insurance needs every 3-5 years as your needs change over time. Don’t put it off as life moves fast.
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