When To Choose Permanent Life Insurance Over Term

Louis LopesWritten by Louis Lopes, CLU ChFC

There are two primary forms of life insurance, term and permanent.

Term life insurance provides coverage for a fixed number of years while permanent life insurance is designed to last for your entire lifetime.

For most people, term insurance is the best option because it is the most cost-effective. However, there a some situations where term insurance is not suitable.

In this insider's guide we've provided some scenarios where term life insurance is not the ideal option, and a breakdown of the most common permanent life insurance policies. Our independent agency represents 63 top-rated life insurance providers and we offer term and permanent life insurance products.

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What Type of Life Insurance Is Best For Me?

When deciding on the right insurance type, the first question to address is how long you need your coverage to last. If you are buying a policy to cover your mortgage balance or ensure your children have money for college, then term insurance, which typically for 20 or 30 years, might suffice.

But, if you need lifelong coverage to reduce estate taxes, establish a legacy trust, fund a special needs trusts, or donate to charitable interests, avoid purchasing term insurance. Term life insurance policies typically expire by the age of 80, and the cumulative premiums of a term policy can exceed your policy's death benefit if you live beyond your life expectancy.

For individuals seeking lifetime insurance, the question then becomes, what type of permanent life insurance is best for my situation? There are various permanent life insurance plans available including; whole life, universal life, guaranteed universal life, indexed universal life, and variable universal life.

How To Compare Permanent Life Insurance Policies

There are several considerations when determining what permanent plan is best:

  • Price: Affordability is key.
  • Cash value potential relative to the premium paid.
  • Consideration of the potential for the death benefit to grow with inflation.
  • Assessing the risks associated with both death benefits and potential cash values.
  • Modern Portfolio Theory, pioneered by Harry Markowitz in the 1950s, provides a fundamental framework for investment strategy. It categorizes most investments into two broad groups: those with high risk and potentially high returns, and those with low risk and lower potential returns. Within these categories, there are several major asset classes:

    1. Equities, which include stocks, stock mutual funds, and real estate, are known for their potential for high returns but also come with higher risks.

    2. Fixed income assets, comprising government bonds, corporate bonds, and mortgages, offer lower to moderate returns with corresponding risks that range from low to moderate.

    3. Cash is a low-risk asset class, with virtually no risk, but it typically provides minimal returns.

    Markowitz's core principle is that investors can optimize their investment outcomes by crafting a well-diversified portfolio that strikes the right balance between high-risk and low-risk assets. This balance should be aligned with an individual's personal risk tolerance and financial goals.

    Is Life Insurance An Asset Class?

    The concept of whether life insurance can be considered an asset class can be broken down into two essential components: the protective aspect and the underlying cash value of a policy. These components provide unique features:

    1. Death Benefit: The death benefit, essentially a lump-sum payout to beneficiaries, can be viewed as a distinctive asset in itself.

    2. Cash Value: The cash value of a life insurance policy varies depending on the type. For instance, Whole Life or well-funded Universal Life policies often invest in fixed income assets, aligning them with cash and fixed income classes. In contrast, a well-funded Variable Universal Life policy, with a significant portion of its value in equity accounts, can be considered an equity asset class.

    There are specific attributes that set life insurance apart:

  • Tax-Deferred Cash Accumulation: Life insurance policies offer the advantage of tax-deferred cash accumulation, which means that the growth of the cash value within the policy is not subject to immediate income taxation.
  • Income Tax-Free Death Benefits: The death benefits paid to beneficiaries are generally not subject to income tax.
  • Estate Planning Benefits: Life insurance policies can be managed in a way that keeps them outside of the estate, which can have estate tax advantages.
  • In this sense, life insurance does exhibit some characteristics of an asset class, particularly concerning the underlying cash value and its tax advantages. However, it's important to remember that life insurance serves primarily as a risk management tool, providing protection for the policyholder's beneficiaries in the event of their death.

    The cash value, while offering some investment-like features, should not be the primary focus of a life insurance policy, as its primary purpose is the death benefit and the financial security it provides to your loved ones.

    Example of Using Life Insurance As An Asset Class

    When incorporating permanent life insurance into your financial strategy, it should be treated as an integral, ongoing part of your plan, similar to managing any other investment. Viewing the premiums as contributions from your investment portfolio, rather than expenditures from your entertainment budget, is key to maximizing the benefits.

    To illustrate this concept, let's consider an individual with a $500,000 portfolio primarily invested in fixed income assets like bonds and mortgages, generating an annual net return of $15,000.
    Instead of reinvesting this income back into fixed income assets, they decide to use these funds to purchase a $1,000,000 life insurance policy within the same fixed income asset class, such as a whole life or universal life policy.

    A comparison of these two approaches reveals that while reinvesting in fixed income assets may provide better returns in the initial 15 to 20 years, the cash value within the life insurance policy becomes more advantageous thereafter.

    Can Cash Value Be Competitive With A Corporate Bond?

    The tax-deferred nature of life insurance gives it the advantage when given enough time to let the tax savings compound. One way to think of a traditional whole life or universal life policy is as a corporate bond fund in a tax-favored wrapper that also has mortality charges associated with it.

    Would you rather pay 2% in higher taxes for which you get the thanks of the government, or 2% in mortality charges for which you get a million-dollar death benefit. If you look at it from the death benefit viewpoint, the life insurance approach will always be superior to the bond portfolio alone.

    Frequently Asked Questions

    Is long-term return the only advantage of cash-value life insurance?

    You can’t talk about potential reward, without talking about risk. A bond fund is relatively low risk, but it is still has some risk. It is subject to market forces, as anyone who has watched their bond fund depreciate by 15% over the last year knows.

    The cash value in a policy is just that, cash. It is not correlated with the market. It is instantly accessible and liquid. So, by incorporating a whole life or universal life policy into the fixed-income account of the investment portfolio, one can lower investment risk and get a better long-term return.

    Wouldn’t someone be better off investing in the stock market?

    That might be true of someone who is aggressive and only invests in the stock market, with no balanced diversification. But if you have some conservative investments then whole life or universal life might be appropriate within that conservative class.

    It’s appropriate to ask, what is my current mix of assets in my portfolio? What is my tolerance for risk? A business owner might feel he takes enough risk running his business and be very conservative with his other assets. A well-paid professional in a secure job might have a completely different answer.

    The answer to the risk tolerance question may also help suggest which type of policy one should be looking at, ranging from a Guaranteed Universal Life to a Variable Life plan. For someone with a very large insurance need, a portfolio of policies might be needed.

    How do I select the right policy for my situation?

    Different types of policies have different characteristics. The choice of policies should be customized to each individual. Not only risk but price, value, potential death benefit increases should be considered.

    The discussion so far has been about someone with an investment portfolio to manage. What if one is starting out and hasn’t built a portfolio yet? There is another type of risk to talk about. There is the risk that the policy is not maintained. If someone loses their job or has a big medical bill and drops their policy, then the permanent plan was not a good choice.

    Someone in a stable position, with and a high income of $300,000 to $500,000 that allows for discretionary spending, might still consider the permanent plans. For others, they might be better off setting money aside in a more flexible plan until they are in a position where they know they can make a long-term commitment.

    This further illustrates the advantages of working with an experienced life insurance agent that can review all your options and help you make an informed decision. 

    Were Here to Help

    JRC Insurance Group is an independently-owned life insurance agency that represents 63 top-rated life insurance providers. Our agents offer at least ten years of industry experience and we are experts are matching our client's with the best policy for their needs.

    If you're on the fence about what type of policy to buy, or if you have questions about your current coverage, give us a call today. Our comparative shopping services are completely free, and we're here to provide you with the advice you need to make an informed decision. Toll-Free at 855-247-9555.

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    Written by:

    Louis Lopes

    Louis Lopes, CLU ChFC

    Chartered Life Underwriter, Licensed Life and Health Agent

    Louis has been in the insurance business for over 30 years. He specializes in “high risk” cases as well as more complex coverages for long term care, disability, and estate planning.

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