Should You Buy Term Life Or Permanent Life Insurance?

Most of the time we will recommend somebody purchase term life instead of permanent life insurance.  In fact, we will probably recommend somebody buy term life instead of permanent life insurance 9 times out of 10.

If you need a high amount of coverage, your need for life insurance is only temporary, and you are looking for the cheapest life life insurance over age 50 you can find then term life is probably going to be your best option.

Perhaps your mortgage is going to be paid off in the next 10 to 15 years.  If you don’t need life insurance after the mortgage is paid for then a term life policy would probably be the best choice.

However, there is a place for permanent life insurance.

Often times we will hear that permanent life insurance is so expensive. Certainly, it does cost more than term life insurance. However, the important thing to really consider is…

What Value Are You Getting For What You Are Paying?

For example…

A piece of meat from McDonald’s or Burger King is going to cost a lot less than a piece of meat from a Ruth’s Chris or some other high end steakhouse.  However, is the fast food hamburger better tasting than the Ruth’s Chris steak?

If you want low cost and quick service, then fast food will be the way to go.  If you want something that tastes excellent then it’s going to take a while, and it’s going to cost a lot more.

Is either one better than the other?

No, but they are different and serve different purposes.

If you were spending the day with your child or grand child, or if you just needed to grab a quick bite to eat you might want to go to McDonald’s or some other fast food place.

If you were planning a special night out perhaps for a special event you might want to make reservations for the high end steak house or some other nice restaurant.

So think about this in life insurance terms.  Consider the example of the mortgage that we spoke about above that is going to be paid off in 10 to 15 years.  If your budget is tight and there really isn’t any extra money to go around, a term a term life policy for 10 or 15 years would be the best option.

However, if you have some discretionary money, then having some permanent life insurance might make sense.

Let’s take a look at some sample rates for a healthy 55 year old man.

55 Year Old Healthy Male - Sample Rates - $100,000

As you can see all else being equal the longer the life insurance is guaranteed to stay in force for assuming the premiums are paid, the more it will cost.

Generally speaking, especially if your budget is tight, it makes sense to only buy a life insurance policy that will last for as long as you need it.  If you truly only need the life insurance coverage for 10 years, then a 10 year term policy can work just fine.

However, let’s assume that there is extra money in the your budget.  The guaranteed universal life policy that is shown in the chart above will continue to stay in force until this man is 120 years old as long as the premium continues to be paid.

$19  vs. $114 per month

The cost difference between the 10 year term and guaranteed universal life policy is huge. As you can see the 10 year costs $19 per month and the guaranteed universal Life costs $114.  That’s a $95 dollar difference!

Look, there’s no doubt that the 10 year term is the most affordable life insurance for 50+ or any age for that matter.

So the question again is does that mean that the 10 year term is better?  Well, it’s the fast food vs. the steakhouse.  They are just different.  The question isn’t which one is better?  The question is which one is most appropriate?

Let’s say you actually needed $100,000 of coverage and you only needed it for 10 years. Presumably the 10 year term policy for $19 is affordable and would be the policy that you should buy.

A $100,000 guaranteed universal  life policy would cost $114 a month which might not be affordable and might not even be needed.

So why might you want to pay for the guaranteed universal life policy instead of the term?

Well, maybe your true need for life insurance protection will last into your 80’s and 90’s. Perhaps because your mortgage won’t be paid off for 30 years because you just refinanced, or perhaps you need to make sure there is money to cover any outstanding debts such as medical expenses you may incur or final expenses.

In these cases a guaranteed universal policy might make most sense.

However, let’s assume for a moment that you really don’t need life insurance beyond 10 years. Would there be any benefit to owning a guaranteed universal life policy?

What if you don’t need the life insurance…you just want it?

Let’s consider the “want” side of life insurance as opposed to the “need” side of life insurance for a moment.

Not everyone has extra room in their budget and not everyone has extra savings to go around. However, some people do.

If you want to leave some extra money to a child, grandchild, or perhaps a charity when they eventually pass away, a guaranteed universal life policy can be an efficient way to do.

It’s important to understand why a guaranteed universal life policy might be the best choice to use for this as opposed to other permanent life insurance products.

A guaranteed universal life policy (GUL)is a low cost way to provide permanent life insurance protection. Some permanent life insurance products cost significantly more than a guaranteed universal life policy, because a good amount of the premium is going towards building up cash value in the policy.

This doesn’t mean these types of cash value products don’t have their place.  They do, but for another purpose which is not the focus of this article.

Guaranteed Universal Life – Low Cost Lifetime Coverage

A GUL is typically designed so that you only pay what is required in order to make sure the death benefit stays in force. This is very different than some permanent life insurance products where there is a greater emphasis on accumulating cash value.

If the goal is to maximize what your beneficiaries receive when you pass away, then building cash value in the policy is not important.

Instead, if the purpose is to pass money along to your beneficiaries as cost effectively as possible, you want to pay the least amount you are required to pay in order just to make sure the policy stays in force.  This helps to maximize the internal rate of return on the death We will get to this in a moment.

A GUL will look and feel a lot like a term policy. With a 20 or 30 year term for instance, you are paying the least amount possible just to have the death benefit for the 20 or 30 year period.

A GUL will do the same thing, but it can do it for a longer period of time. So for our example here, a 55 year old could buy a GUL that would last until age 120.  That’s kind of like having a 65 year term policy.

Now, let’s be clear.  A guaranteed universal life policy is not a term life policy. It’s just looks and feels like one when designed for this purpose.

So does it make sense to buy a GUL as a way to pass money along to perhaps your kids, grand kids, or a charity?  Well, let’s look at the numbers.

The Math

What we know about life insurance is that the death benefit will be paid you when we pass away.  What we don’t know is when we will pass away.

The monthly premium for the GUL is $114, and we know when you pass away the death benefit will be $100,000. It is obvious that from a pure mathematical point of view, that paying the premium for one month and then passing away would provide the highest internal rate of return (IRR) on your premium dollars.

In other words, you pay the insurance company $114 and the insurance company pays out $100,000 to your beneficiary.

Now, we hope that’s not the case.  Hopefully, we will all live a long, healthy, and full life!

However, again from purely a mathematical point of view that’s when the numbers would be most favorable to you and not the insurance company.

Over time the IRR will go down.  Let’s look at the numbers for our healthy 55 year old man.

55 Year Old Healthy Male - $100,000 - IRR

If you aren’t familiar with IRR this is what we are referring to…

In this example this 55 year old man would pay $114 per month.  If he passed away at age 85 the $100,000 would have paid to his beneficiary.  He would have needed to have earned a tax free rate of return of 5.39% on his money if he had invested that money in a different investment vehicle to equal the $100,000.

What we don’t know of course is what the IRR will eventually be since the IRR will depend on the day we pass away.  However, we do know  that the death benefit that will be paid to the beneficiaries will be more than than the premiums that we were paid to the insurance company.

So what policy should you buy? As we always say, it depends. Hopefully this article gave you a little more of a sense of the right policy for you.

Also, keep in mind that you can have more than one life insurance policy. For some people in their 50’s and 60’s a combination of term and permanent life insurance is the right choice.  The key when you are trying to save money on life insurance when you are over 50 is make sure the life insurance is affordable and at the same time also meets your needs.

If you have any questions or would just like to discuss your options feel free to give us a call.  We are here to help.