Should I Buy Term or Permanent Life Insurance?

By Tom Kestler

My answer to this question is the same answer I provide to almost every financial question – “It depends”. The most important question, the one you should be asking first, is how much life insurance do I really need? Until you know the answer to this question, you can’t possibly answer the other one.

When it comes to risk, like the risk of a premature death, we all have three choices:

1. Avoid the risk – No matter how carefully we live our lives, we’re all going to die. The question is, when?

2. Assume the risk – If you’re independently wealthy and have more than enough to cover all your liabilities and provide for your heirs, this may be an option.

3. Transfer the risk – For a proportionately small premium, you can transfer the risk of your early demise to an insurance company.

Since most people will end up choosing option 3, the next decision is how much.

There are lots of online calculators to arrive at your number. But keep in mind that

your number will change dramatically over time. Consider the following.

You’re single and working at your first job. Your need for life insurance is minimal. You haven’t acquired a lot of debt (hopefully), and you have no need to provide support for your survivors.

You get married. Now things have started to change. You begin to take on joint responsibilities – car loans, mortgage, etc. Your survivor may not be able to satisfy these liabilities on their own. Your number increases.

You have children. Realistically, your need goes through the roof at conception. Now, in addition to your other liabilities, you face the risk of leaving your surviving spouse with 20 years or more while supporting that family with limited ability to earn a living. What’s the present value of that future, inflated shortfall?

Do you want your kids to go to college? It’s hard enough with two parents working, let alone if one of you is dead. Most people want to be able to ensure that this can happen. What is today’s cost for a four-year college education? Inflate that out to their start date, then ask how much do I need to set aside as a lump sum today to provide that future, inflated tuition cost? Now consider that number for each child.

When you add all this together, the number can be staggering. But remember, throughout this time, you’re building assets that can help to offset this number.

You’re also slicing one more year off the long-term income needed annually. As the kids leave the nest, their ongoing support reduces (hopefully.)

As you can see, your personal insurance need is a moving target. Think of it as a bell curve – low in the beginning, increasing drastically as your family grows, then decreasing as you approach retirement.

Now, back to our original question. The type of insurance you buy is nowhere near as important as getting the quantity right. There are lots of online calculators to help you get the number right.

Once you have your number, Choosing the right type of coverage gets easier. Let’s look at the three basic types of life insurance coverage.

Term insurance – This is pure coverage that you can use for a temporary increase in need. For example, you can purchase term insurance in 1-year, 5-year, 10-year, 20-year, or 30-year blocks. The coverage remains level for the term and ceases at the end of the period. Term insurance is the least expensive way to provide coverage for a specified period.

Whole life insurance – This is guaranteed coverage to age 100. In a whole life policy, by the second or third year, it starts accumulating guaranteed cash value that grows each year and will be equal to your face amount at age 100. Since the premium, cash value, and death benefit are all guaranteed, this tends to be the most expensive option. Also, since agents are paid a commission based on the first year premium of what they sell, some may be encouraged to sell a lesser amount of whole life rather than the appropriate amount of term.

Universal Life – This type of coverage accounts for about 50% of all sales today. Like whole life, it is also a permanent policy, but it has flexible premiums and flexible death benefits. The cash value accumulation can be based on a fixed interest rate, indexed to market indicators, or based on performance of chosen subaccounts (like mutual funds).

Things to keep in mind when purchasing life insurance:

1. Always know your number.

2. Don’t sacrifice coverage for policy type.

3. Always know the number for your spouse.

4. Deal with a reputable agent. Ask for references. Look for credentials like CFP (Certified Financial Planner), CLU (Chartered Life Underwriter), ChFC (Chartered Financial Consultant).

5. Review your coverage needs and beneficiary designations regularly.

6. With permanent plans, review your annual statement every year. Total cash value should increase annually. If you see it beginning to decrease, contact your agent for a review.

A final thought…I’m often asked if people should insure their children. Again, it depends. If the parents are sufficiently covered, and you have the financial capacity, there may be some advantages to buying life insurance for your children.

First, acquiring some type of permanent life insurance (I prefer UL) for a child locks in their insurability while they are young and healthy (preferred rates). This hit home for me when two of our three children, who I had insured, contracted a health condition that would potentially affect their future insurability.

A second consideration is that a policy purchased at a young age could accumulate significant cash values by the time they are an adult; giving them a good head start on their own financial planning.

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Tom Kestler has been involved in the financial planning field for over 45 years. He is a graduate of Millersville State University and the College for Financial Planning in Denver, Colorado (for which he has acted as an adjunct instructor) and carries the Certified Financial Planner (CFP) designation.

He has also been awarded the Chartered Life Underwriter (CLU), Chartered Financial Consultant (ChFC) and Chartered Mutual Fund Counselor (CMFC) designations from the American College in Bryn Mawr, PA. He was the founder of Kestler Financial Group, Inc., a firm which specialized in the marketing of financial products and services to over 5,000 independent representatives throughout the United States. Kestler Financial Group was acquired by Highland Capital in 2018.

Mr. Kestler carries Life, Health and Variable Products licenses in several states and provides consulting services to insurance companies on product design and development. He also acts as an expert witness in securities and insurance litigation cases.

Prior to his retirement, Tom served as VP Advanced Sales at Highland Capital, and also CEO of Branch Development Partners, an Office of Supervisory Jurisdiction (OSJ) for Securities America, Inc. (now Osaic), an independent securities broker/dealer.

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