Term vs. Permanent Life Insurance
The fact that some ‘investment gurus’ (whose jobs are often tied to the securities industry) raise the debate as a singular resolution of ‘term life vs. permanent life insurance’ displays a narrow-mindedness on their part in the unwillingness to support the reality that in some cases an individual may do better with term insurance, another with a whole life or universal life plan, and again another with a combination of both permanent and term life insurance. Especially, in this time of volatile returns, most cautious and mature investors understand that sometimes in your life a low rate of return on a guaranteed investment is more prudent than having losses on a speculative investment while seeking higher returns.
Many middle aged individuals who began practicing the ‘buy term and invest the difference’ philosophy a decade or two ago, after seeing significant losses in their portfolio, and significant increases in their term premiums, have come to regret their decision. And worse, many have found themselves with a savings lower than expected and with the difficulty of not being able to pay the higher term premiums or buy the cash value plan they once could afford. There is another idiom or saying in the financial industry – ‘don’t put all your eggs in one basket.’ Some take great pride in wisely suggesting to the average investor, ‘in today’s unpredictable market you should earnestly consider a diversified approach to achieving your goals.’ (Translation: ‘I do not truly know what the S & P 500 Index is going to do, but you probably should throw some money that way, because it has always seems to eventually rise, and hey, CDs, fixed annuities, and money markets are not offering much.’) That may often prove to be good advice, but more importantly, shouldn’t couples young and old, as well as single parents, be educated to the fact that there are many circumstances that warrant diversifying an insurance portfolio as well?
- SOME FACTS AND EXPLANATIONS:
(Note from researcher: The following is not intended as a campaign against term insurance, I sell more face amount in term insurance than face amount of permanent insurance. Neither term life insurance or permanent life insurance should exist alone in the market.)
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TEN INSURANCE INDUSTRY FACTS with commentary |
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1 |
In 2010 according to a LIMRA study:53% of the adults who are insured have only permanent life insurance;
37% of the adults who are insured have only term life insurance; 10% of the adults who are insured have both term life and permanent life insurance; In 2004, 19 % of the adults insured had both.
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There is likely a shortage in America adult’s purchasing term insurance with permanent life insurance plans. Also, many still buy high priced ‘burial’ whole life plans, instead of quality whole life or universal life plans with term riders that would give many buyers twice the cash value & death benefits than they currently have. |
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2 |
According to the ACLI Life Insurers Fact Book 2011: the total Life Insurance in force from U.S. Life Insurers was more than $ 18.4 trillion. | On average benefits paid out from insurers equaled about 2.8 % of their total in force life insurance. |
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3 |
According to the ACLI; Life insurance premiums received by those selling Credit insurance was about $1.8 billion in 2000, and $ 836 million in 2010. NAIC & ACLI showed that in 2010 ‘payments to life insurance beneficiaries’ through ‘Credit’ life was 448 million for 214 thousand policies. | Credit Life (in 2010) paid out less than $ 2,150 per policy and about 53% of premiums received as benefits to beneficiaries. Most of their policyholders would do better playing slot machines. |
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4 |
Less than 2% of term life insurance policies in force pay death benefits. | Know why and how long you need life insurance coverage. |
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5 |
Mortality and Life Expectancy:ACLI study showed: ‘A 25-year-old during 1900-1902 could expect to live 39.1 years more vs. 54.3 additional years for a 25-year-old in 2009.’In 2009, a 45 year old male is expected to live 33.5 more years and a female 37.3 more years; and a 55 year old (male & female average) is expected to live 26.8 more years.
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Note: very few insurers sell 30 year level term plans to 51 year olds; none I know of will sell a 30 year level term to a 61 year old. Nevertheless, a 45 year old is expected to outlive their 30 year level term plan; and a 55 year old is expected to outlive their 20 year level term policy. |
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6 |
According to the ACLI Life Insurers Fact Book 2011: the total benefit payments from U.S. Life Insurers were about $500 billion. | Note: Top rated insurers typically pay out more dollar amounts in benefits than other insurers. |
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7 |
Top 10 ranked Life insurers selling both permanent and term insurance typically paid out about 2 % of their life insurance in force as benefits and dividends to policyowners. | Primerica paid out about .015 % of the life insurance in force as benefits to policyowners. |
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8 |
In 2010 top ranked Life insurers selling both permanent and term insurance on average paid out more than 80 % of their revenue received from premiums in the form of benefits and dividends to policyowners.Note: in 2010 MetLife received $ 17.2 billion in premiums and paid out over $ 19 billion in policyholder benefits and dividends; and Prudential Financial received $ 15.2 billion in premiums and paid out $ 14.9 billion in policyowner benefits and dividends.
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Primerica (one of the largest single sellers of term insurance) paid out about 43% of their $ 2.2 billion of premiums received in 2010 – about half as much in benefits.Note: in 2010, $ 293 billion of the $571 billion premium receipts from life/health insurers were from ‘annuity considerations’ and $ 104 billion from life insurance premiums and of their $ 862 billion in ‘total income’ about $ 213 was ‘investment income.’ |
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9 |
Primerica: 2010 Annual Report:‘…2010, we became …publicly traded on the NYSE… We trace our roots to A.L. Williams… (who) popularized the concept of ‘Buy Term and Invest the Difference…’ Forbes.com; Arthur Williams net worth is 1.5 billion (that’s dollars). | Note: Mr. A. L. Williams in 2010 was worth about one and a half times more than Primerica paid out in death claims to beneficiaries that year. |
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10 |
Primerica: 2010 Annual Report:‘$ 939 million of death claims in 2010’‘We insure more than 4.3 million lives’
Life insurance in force: $ 662 billion $ 600 billion ceded to other reinsurers Primerica held $ 61 billion in 2010 Total Premiums received in 2010: $ 2.2 billion Compensation to agents: $ .5 billion
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Note 2010:Death benefits were less than 1/662 of their life insurance in force: .015 % of their life insurance in force. Their benefits paid out were equaled to about 43% of their premiums received. |
- DETERMINE AND CATEGORIZE YOUR NEEDS:
It is highly recommended that a buyer of life insurance should consider all of their needs and purposes for buying life insurance coverage. Furthermore, they should categorize their objectives, such as short-term needs to cover credit card balances and car loans; medium-term needs such as providing a educational fund for young children; and long-term needs such as covering a 30 year mortgage, future long-term care cost, final expenses, and even estate settlement cost. After this the buyer is in a better position to know which product or combination of products to buy. Just as it is most often sensible to have multiple or a combination of beneficiaries, it is most often sensible to combine life insurance plans: group life insurance benefits, as well as individual term and permanent life insurance plans that are in accordance to the policyowners needs.
- A COMPARISON OF TERM; WHOLE LIFE; and WHOLE w/a term rider:
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35 YEAR OLD MALE NON-SMOKER COMPARISON is based on $ 250,000 FACE AMOUNT purchased from a TOP INSURER (Combination plan, term rider is dropped after 20 years; Term plan is term to 90) |
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TERM Cumulative Premiums |
TERM Death Benefit |
Whole Life Cumulative Premiums |
Whole Life Death Benefit |
Whole Life w/term Cumulative Premiums |
Whole Life w/term Cash Value |
Whole Life w/term Death Benefit |
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| Year10 |
4,000 |
250,000 |
29,000 |
260,000 |
19,000 |
16,000 |
255,000 |
| Year20 |
8,000 |
250,000 |
58,000 |
275,000 |
44,000 |
43,000 |
265,000 |
| Year30 |
12,000 |
250,000 |
65,000 |
255,000 |
61,000 |
86,000 |
190,000 |
| Age 70 |
31,000 |
250,000 |
65,000 |
255,000 |
69,000 |
115,000 |
210,000 |
| Age 80 |
140,000 |
250,000 |
65,000 |
270,000 |
80,000 |
180,000 |
250,000 |
| Age 91 |
300,000+ |
0 |
65,000 |
335,000 |
80,000 |
300,000 |
350,000 |
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50 YEAR OLD MALE NON-SMOKER COMPARISON is based on $ 250,000 FACE AMOUNT purchased from a TOP INSURER (Combination plan, term rider is dropped after 20 years; Term plan is term to 90) |
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TERM Cumulative Premiums |
TERM Death Benefit |
Whole Life Cumulative Premiums |
Whole Life Death Benefit |
Whole Life w/term Cumulative Premiums |
Whole Life w/term Cash Value |
Whole Life w/term Death Benefit |
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| Year10 |
15,000 |
250,000 |
60,000 |
265,000 |
41,000 |
33,000 |
255,000 |
| Year20 |
30,000 |
250,000 |
110,000 |
290,000 |
110,000 |
85,000 |
285,000 |
| Year30 |
45,000 |
250,000 |
110,000 |
265,000 |
140,000 |
160,000 |
235,000 |
| Age 70 |
30,000 |
250,000 |
110,000 |
290,000 |
110,000 |
85,000 |
285,000 |
| Age 80 |
45,000 |
250,000 |
110,000 |
265,000 |
140,000 |
160,000 |
235,000 |
| Age 91 |
350,000+ |
0 |
110,000 |
275,000 |
140,000 |
270,000 |
315,000 |
- RATE OF RETURNS AND COMMISSIONS:
The days of displaying double digit rate of return projections on long-term mutual fund or universal life side accounts are irresponsible and unprofessional. As registered reps know from a compliance standpoint, ‘past performance is no guarantee of future performance.’ History has shown that between 1926 and 2010 the annualized return for the S & P Index (adjusted with S & P 90) was 9.8 %; the 5-year return between 2006 and 2010 was about 2.3%; the 10-year return to the end of 2008 was negative; the 5-year return to Mid-2012 was negative; and the 10-year to mid-2012 was less than 4 %. (Not adjusted for commissions).
As for commissions (not taking into account retirement formulas, persistency or trail commissions): the commissions by an average insurance company to their agent or broker over a 20 year period for a $ 150 monthly premium into a whole life is about $ 2,000; the average commissions over a 20 year period for $ 150 of monthly premium and investment into a 20 year term policy and investing the difference is about $ 1,000 without rollover of investments at the end of the period and about $ 3,000 to $5,000 with rollover of investments at the end of the 20 year period. The buyer should focus on their needs and not the agent’s commissions; however, not many of us settling an estate and selling an inherited property like to see a real estate agent make $ 10,000 (split with their firm, other agents, etc.) for 40 hours of work, while the per stripe grandchild gets $ 20,000 for 40 years of love and relationship.
- FOR MORE INFORMATION (see the Sitemap for the following articles):
Term Life Advantages & Disadvantages
Whole Life Advantages & Disadvantages
Universal Life Advantages & Disadvantages
| Note: Most people who do buy term and invest the difference either withdraw funds early from their separate accounts before retirement, or use great portions of their funds during retirement; thus, either way, depleting their supposed ‘self-funded life insurance needs’ and often leaving significantly less than expected funds available for their loved ones (beneficiaries). |
