The Debate over
Term Vs Permanent

by Norlyn Dimmitt, FSA

For most people, InsuranceGuide recommends term insurance over permanent plans like whole life or universal life. There are two main reasons for our stance.

First, most people don't need life insurance protection past retirement. The primary reason for life insurance is to protect loved ones against income loss. For a retired person with income that will substantially continue for his or her spouse, the primary risk is outliving existing assets. Children are typically grown and self sufficient at retirement.

Secondly, the cost of insurance rates for permanent plans are typically dramatically higher than the cost of the same pure protection with a term life insurance policy. Tax deferred build-up of cash value is the biggest selling point for permanent plans, but unless someone is putting close to the maximum possible premium into the policy, tax deferral will very often never overcome the higher cost of protection.

Universal life, wildly popular in the mid 80s when credited interest rates were high, deserves special comment. Agents who compare "buying term and investing the difference" to universal life too often fail to remind clients that the illustrated cash values for the universal life policy have a significant deferred tax liability, which the "invest the difference" account has already paid. Recent laws have eliminated the most egregious abuses in illustrating universal life policies, but the fact remains, universal life is sold on the basis of projected numbers that are completely nonguaranteed. The guaranteed column in the vast majority of universal life illustrations is not going to persuade many people to make universal life a pillar of their retirement savings plan.

Notwithstanding the above cautionary comments, permanent plans can be appropriate for some people, especially those who are putting in the maximum possible premium, or those who really do need protection well beyond retirement. Insurance protection is usually a secondary consideration in most of these cases.