The Term/Perm Life Insurance Debate Riddled With Fallacies
By Erica Davis
There are several semi-famous authors and media personalities who push their financial advice to the masses, often while misrepresenting themselves as life insurance experts. These self-proclaimed life insurance pundits are painting a pro-term and anti-whole life picture for the general public.
However, as with any major financial decision, it is always best for prospects and clients to be informed of the available options along with their pros and cons. Let’s clear up a few common life insurance fallacies that have been fed to the general public over the past few decades, and how you can debunk them.
Fallacy No.1: Term life insurance is the best.
Term life insurance is not a one-size-fits-all solution. It is named term insurance for a reason — it is only meant to be used for a short term. It certainly may work well for many scenarios, such as paying off a mortgage or other debts, covering key persons in a business, or protecting incomes when budgets are tight during the client’s early working and child-rearing years.
Conduct a thorough needs analysis for your clients to determine which life insurance plan, or combination of plans, is a good fit for their situations and goals. Compare the process to a doctor visit.
If you show up and ask for medicine and the doctor hands you a generic prescription without asking any questions, you’d probably stop going to that doctor. You’d expect the doctor to ask questions about your symptoms, thus enabling the doctor to analyze your specific needs and prescribe the most effective medication for you.
Fallacy No.2: Whole life insurance is a rip-off.
It is true that whole life insurance premiums are higher than term premiums, especially for large amounts of coverage. However, like many shopping decisions, clients get what they pay for, and they often increase certain risks when they choose the less expensive option.
Clients must understand that eventually the term plan will run its course and end. Whole life coverage provides guarantees, living benefits, cash value build-up and nonforfeiture options. It allows the owner to make changes later, should they decide to discontinue paying ongoing premiums.
Explain to clients that buying life insurance is a lot like choosing a new car. Do they need an economy compact car or a luxury vehicle? The luxury option has higher value and those who understand that fact are willing to pay more for something they will trust to last.
Fallacy No.3: Fewer than 1 percent of term insurance policies actually result in a death claim payout.
I spent hours searching for data to support this statistic of fewer than 1 percent. After having no luck finding the information online, I contacted LIMRA. Their representative said that they believe this original statement was made at the University of Pennsylvania in the 1960s and that there is not a current published statistic that supports that statement.
But I still wanted empirical evidence so that I could bust this myth, so I decided to dig deeper in a different manner. I examined the life insurance block of business that went off the books over the past 30 years at my company. Here are my findings regarding the rate of death claims paid based on policy count per type of life insurance:
Term life at 3.4 percent; universal life at 11.8 percent; traditional whole life at 15.3 percent; and single premium whole life had the highest rate of death claims at an impressive rate of 63.9 percent.
One could glean from these figures that permanent life insurance is significantly more likely to pay out a death benefit — but this does not mean that term insurance is a bad idea.
A New Look At Life Insurance Needs Analysis
There’s a plethora of needs analysis tools available for life insurance planning, ranging from fancy software programs to basic one-page forms with a few fill-in-the-blanks.
These tools typically group all life insurance needs together to determine one grand total.
Instead, they should be breaking out the needs into two specific categories: short-term and long-term needs. This approach could help to ensure that the proper types and amounts of coverage are provided for the two categories of needs.
The short-term category should include expenses such as income replacement, mortgages and other debt, children’s college education needs, and an emergency fund. Eventually, the client’s debts will be paid off, the client’s children will become adults and a fair amount will have been saved for the client’s retirement. At that point, they can ditch the term coverage.
The long-term needs category should include funeral expenses, funds to cover anticipated estate taxes, and financial legacies for heirs and/or charities.
A strategy to consider is to start with a large term policy, with plans to convert it to a smaller permanent policy later (as long as there is a conversion option provided on the term plan). Make the client aware that when converting from term to permanent later, the rates for the permanent plan will be based on an older age, resulting in a much higher premium. Locking in permanent coverage at a younger age also locks in lower rates. The cost of waiting is an opportunity cost that clients must seriously consider.
Regardless of the type of insurance required, it is our duty to conduct thorough needs analyses to determine the best solutions for each and every client.
Erica Davis, FLMI, ARA, AAPA, ACS, is a senior marketing specialist at United Life. She has served the insurance industry in various marketing, educational and agency support capacities for more than 18 years. Erica may be contacted at [email protected]