Term vs Permanent Life Insurance: What’s the Difference? Financial Advisor Explains

Unknown

If you wanted to evaluate your life insurance coverage, you’ve probably asked yourself three questions. How much do I really need? What type should I get and how much will it cost? The answers to these questions might actually be simpler than you think. Let’s chat.

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Unknown

My name is Gina DiGirolamo. I’m here with Dan Seder, managing partner of blue Chip partners.

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Unknown

And Dan, today we’re talking about life insurance,

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Unknown

which is an important part of every financial planning process. But unfortunately, I think in our industry it can sometimes have a lack of transparency. So diving right into this, what would you say to someone evaluating their coverage of how much insurance might they need?

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Unknown

That’s the first place you go. What do I how much do I need?

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Unknown

So it depends on where you are in life. So someone who is on the verge of retirement, who has built up a tremendous amount of wealth and is ready to transition into that next phase of life, may have no insurance need. If they were to pass away, their family would be the beneficiary of the assets that they’ve built up over the course of their career.

00:01:27:20 – 00:01:59:18

Unknown

If someone’s 28 years old with a young child and a mortgage, and they want to fund future college expenses for their kids or replace their income, they might need a tremendous amount of of life insurance to protect for the wealth that hasn’t been built up. The life insurance death benefit would would replace that future income stream. So you have to look at what’s the opportunity for future earnings.

00:01:59:20 – 00:02:25:21

Unknown

Do I have any debt on the books that I want to pay off like a mortgage? Future expenses could be college education that I mentioned. Yeah. It’s establishing, a baseline for the surviving spouse to retire or step away from work or stay at home, depending on their circumstances, and still fuel and fund their basic living needs.

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Unknown

So once, once someone has determined how much coverage, what type should they be looking at? Or what are the different types of life insurance?

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Unknown

Generally speaking, generally general in nature, there’s two types. There’s term insurance and there’s permanent insurance. And so let’s start with term. It’s very basic. It’s very straightforward. Term insurance is designed to cover the insured for a set period of time.

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Unknown

Term insurance can be ten years in length 15 years in length 20 years in length. There are even 30 year term policies. And so what you do is you pay a premium for the coverage. The insurance company offers that coverage as long as you pay the premium. It’s called a unilateral contract. If you stop paying the premium at any point, the coverage goes away.

00:03:17:03 – 00:03:38:03

Unknown

There’s no commitment. So even if you have a ten year term policy and you’ve paid into it for two years and you say, I no longer need the insurance, you can just stop paying the premium and the coverage. The policy will lapse and the coverage will go away. There’s, a separate type of a different type of policy called permanent insurance.

00:03:38:04 – 00:03:59:08

Unknown

Now, there are very, a number of flavors of permanent insurance which we don’t need to get into today, but permanent insurance is exactly what it sounds like. It covers you for, the totality of your life. It’s permanent. It doesn’t only exist for ten years, 15 years, 20 years. It covers you for the remainder of your life.

00:03:59:10 – 00:04:40:00

Unknown

So, there are different use cases for term insurance, and there are different use cases for permanent insurance. It’s important that you understand the difference. Outside of just the the temporary nature of term and the permanent nature of permanent insurance, permanent insurance, many times, not all the time, comes with a cash value component that can be thought of as some form of savings that is accruing inside that permanent policy, which again, depending on your financial circumstances in your financial plan, may or may not be appropriate.

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Unknown

That’s a great explanation. The question that everyone is probably thinking is how much does this actually cost? If you could give me an example of of a term and a permanent what that looks like, how much does it cost?

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Unknown

Yeah. So again we have to talk generally here generally term insurance because it’s covering you for a very specific period of time is less expensive.

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Unknown

So if the insurance company is covering the likelihood of me dying over the next ten years, the cost will be less than the next 20 years or the next 30 years. So the further out you extend the term, the more expensive that term policy will will be in terms of a premium payment. On the other hand, in permanent insurance, if you are covering if the insurance company is covering the life of someone forever, we will inevitably at some point pay out a death benefit, whether it’s tomorrow or in 50 years from now, then we can just logically, understand that the premiums on those policies are much larger because the policy, if

00:05:55:09 – 00:06:40:21

Unknown

you continue to pay the premiums, ultimately pay out at some point over time. And so, it’s it varies in both cases based on your age, your health status, the amount of insurance that you may need, depending on the type and how you utilize it, can vary. But generally speaking, and again, I hate to put specific numbers on this, but, 45 to 50 year old male, who has household income of half $1 million with middle school kids, let’s say, mortgage balance and band, they want to cover the mortgage and pay for college and make sure that their spouse maintains their standard of living.

00:06:40:23 – 00:07:18:18

Unknown

They could they could need 5 to $10 million of insurance coverage. Generally speaking, that could cost, 4 or 5, six, $7,000 per year. And again, the very general it’s going to depend on the individual circumstances. The permanent policy for the same 5 to $10 million could cost tens of thousands of dollars. And I don’t mean 10,000. I mean tens of thousands of dollars per year for the same 5 to 10 million of coverage.

00:07:18:18 – 00:07:32:06

Unknown

It’s exponentially more expensive. And so you have to really understand the the reason why you’re implementing term versus permanent and that it fits into your financial plan.

00:07:32:08 – 00:07:43:02

Unknown

We see this so often where, an individual or a family will have gotten life insurance coverage years ago, maybe when they had their first child or, you know, whatever the situation was.

00:07:43:02 – 00:07:59:17

Unknown

And now, 20 years later, they’ve never looked at these policies and they’re asking, why am I still paying these premiums? So what would you recommend if someone is evaluating their coverage? Like how does that how does that look as your life changes, what should they be thinking about?

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Unknown

I touched on this briefly at the beginning, but in many cases not all because there are certain circumstances where insurance is is very appropriate for the duration of your life.

00:08:11:09 – 00:08:39:01

Unknown

Life insurance is appropriate for the duration of your life, but there are also many other circumstances where the insurance, in a sense becomes obsolete, meaning you’ve you’ve you haven’t died. First and foremost, you’ve worked over the course of your career, you’ve saved and you’ve built up your net worth, and you’re at the point where you’re maybe on the eve of retirement and wages moving forward are very limited.

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Unknown

You’re you’re no longer going to have employment income because you’re looking at retiring at some point. Well, insurance coverage may not be that important because if that person who is on the eve of retirement passes away, they’ve accumulated wealth, they’ve built up their asset base and their family is most likely going to be okay if they’re no longer in the picture economically.

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Unknown

I hate to sound insensitive on that, but I’ve meaning if they’re no longer bringing wages or earned income into the household, and they’re no longer they’re the assets that they’ve accumulated over time can step in and make up that economic difference in, in many or some cases. So, so there’s a, there is an environment where the insurance becomes obsolete because you’ve built wealth, and the wealth steps in to replace the insurance.

00:09:30:06 – 00:09:56:09

Unknown

And in that case, if you have insurance policies, as I mentioned before, these are unit not unilateral contracts. If you stop paying the premiums, in many cases the policy will lapse. Or you can call and surrender the policy, but you’re not required to keep these forever, particularly term. You’d want to be careful on the permanent side if there is a cash value component, you wouldn’t want to stop paying premiums.

00:09:56:09 – 00:10:16:23

Unknown

And then the cash value starts to fund a policy that you think is no longer there. So, there there are some steps and measures that you’ll want to take to make sure that you do exit a policy appropriately. But you also want to make sure that it is appropriate in the first place to exit. So it’s really building it into your financial plan.

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Unknown

I mentioned at the beginning that there is sometimes a lack of transparency when it comes to life insurance. What would you say are some red flags if you were talking to someone looking at their coverage? What? What should they look out for? So term insurance to me is so straightforward. And you can understand replacing income or paying off a mortgage or covering kids college costs.

00:10:40:17 – 00:11:19:01

Unknown

It’s very straightforward. If this then that. If I die, my family gets bad. I think permanent insurance is, much more complex. It’s it’s not always easily understood because of the way that it’s presented or just the sheer complexity of the products. Having both, insurance death benefit plus the cash value component. So if you don’t understand exactly how the policy works and why it’s being used in your personal circumstances, that’s a red flag.

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Unknown

If you don’t understand it, you have to understand why you have these policies. Now I’m going to go into a second layer of an appeal. Peel the onion back there just a little bit. The main red flag is the conflict of interest that I often see with insurance agents that sell life insurance policies. We talked about term insurance is often less expensive than permanent insurance.

00:11:44:05 – 00:12:16:23

Unknown

Permanent insurance can be more expensive by a factor of ten or more. It’s it’s very, very expensive depending on the circumstances. And so keep in mind consumers have to remember that insurance agents are paid commissions based on the amount of premium that you pay. So if you pay a higher premium for permanent insurance, an insurance agent in many cases will get a higher commission if you pay a lower premium for term insurance.

00:12:17:00 – 00:12:46:22

Unknown

In many cases, the insurance agent will get a lower commission. And so there is a conflict of interest in terms of the recommendations. Periodically we’ll see. Clients who have bought policies in the past that probably weren’t appropriate but were sold to them in whatever fashion they were sold because, the insurance agent pushed an agenda because it was more in the insurance agents best interest for the client to pay a high premium in the form of buying permanent insurance.

00:12:46:23 – 00:13:03:08

Unknown

So. So, I think a consumer needs to remember that they there could be a conflict of interest with the agent in the end product, and they need to really understand what it is that they’re buying. They have to understand the product that they’re that they’re purchasing.

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Unknown

As a final recommendation, what would you say if there was 1 or 2 tips that you’d offer to someone evaluating their coverage?

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Unknown

What would that be? Talk to you. Talk to a wealth manager or a financial advisor. I think you have to integrate the life insurance decision into your financial plan. It’s not should I get insurance? Should I not get insurance? It’s how does it fit into the big picture? And I think I and again this is general but from what I see anecdotally talking to clients or prospective clients is many people will have a group policy through work and maybe it’s, 750,000 of coverage and they’ll think that they’re okay because they have 750,000 of coverage again, depending on their circumstances, those numbers can vary.

00:13:55:04 – 00:14:20:02

Unknown

But I think the vast majority of individuals that I see are are in fact underinsured. So it’s it’s making sure that you meet with a wealth manager or a financial advisor that is making helping you make this decision in terms of the totality of your financial plan, not just in terms of the product that you’re considering buying.

00:14:20:04 – 00:14:36:21

Unknown

Great explanation Dan. So this is something that, like you said needs to be evaluated in your entire financial plan, not just a one time decision. So if this is something that you would like to review for yourself and if it makes sense, reach out to our team at blue Chip partners. We’d be happy to help.

00:14:36:23 – 00:14:43:09

Unknown

Thank you for joining me for the conversation, Dan. Thanks for having me, Gina. Absolutely. And thanks for watching. Can’t wait to chat again soon.