Ask the Experts by Dan H. Tripp CLU
Q: I’m 35 and looking to buy my first life insurance policy. Why would I ever buy permanent insurance when term is so much cheaper?
A: My first thought is buy insurance that you can afford, in an amount that makes sense for your situation. And yes, term is much more affordable in terms of premium dollars. But in the words of a wise sage “price is only an issue in the absence of value.” What value would you get from each?
It helps to think about the difference between the two as the difference between renting and buying a home. Both provide shelter; require payment of utilities, maintenance, upkeep, etc. But here the similarities end. When renting, your rent may go up over time. Your landlord can refuse to renew your lease for any reason at the end of the term (notice that word?). Ownership comes with a mortgage payment that is fixed unless you change it. Ownership builds an equity position in your home, which could be leveraged at a future date. Unless you stop paying your mortgage, you can live
there as long as you want. A good permanent policy will provide a form of equity through the cash value component.
Permanent life insurance is valid for your whole life, not just part of it. Why is this important? For one thing, we are living much longer as a nation. Life insurance companies now use a life expectancy of 125 years for pricing policies, even though no one is living that long – yet. A 35-year old’s life expectancy is about 79. Meaning half of all 35-year olds will live longer and half won’t. Which half are you in? Unfortunately, we don’t have that answer. Do you want coverage no matter how long you live, or for only a portion of your life?
Your answer will determine which kind of insurance makes the most sense and gives the most value. If your objective is to only protect your income, then term might be your answer. If your goal is to protect your income, your retirement plan, and provide a legacy, no matter when you die, then permanent life insurance is the way to go – or a combination of the two. There are two more things to consider. The first is the younger you are, the less you pay for life insurance. A permanent policy locks in your premium for life; term locks in the premium for the term purchased, usually 10, 20 or 30 years. You can renew your term later, but that brings me to the second consideration: your health. If your health becomes a problem, your renewal rates may be very high, or you may be ineligible for coverage. Permanent insurance has no renewal, so your rates are the best they will be for life. Talk to your agent. Do your homework. Your family will appreciate the foresight.
Dan H. Tripp is an independent agent with over 27 years’ experience helping individuals, families and small business navigate the complexities of life, disability and long-term care insurance. He holds a CLU designation from The American College, and is a member in good standing with NAIFA and the Society of Financial Service Professionals. He can be reached at 313-478-4337 or firstname.lastname@example.org. Tripp is a member of The Family Center’s Association of Professionals.