Permanent insurance is not an insurance product that can be taken lightly.
It’s a product that is only right for certain insurance needs and circumstances that could help or hurt you, depending on how it is used. The Globe and Mail published a piece on the “Pros of Permanent Insurance” and, while all of them are true, they’re only telling half of the story.
We’ve outlined the pros and cons of permanent insurance below, so that you have all the information and can truly select the right insurance product for you and your family.
First, the pros. Of course, we cannot outline the risks of an insurance product without also mentioning its strengths.
Pros
A permanent policy remains active regardless of age – One of the first positives outlined in The Globe and Mail article has to do with the fact that most term insurance policies expire at a certain age. With permanent insurance, you don’t have to worry about that. A permanent policy remains in-force for life.
You can grow an investment within the policy – Two kinds of permanent policies — Universal Life and Whole Life — come with an investment component. For every single dollar you pay in annual premiums, you have the option to contribute three to four dollars into the investment fund attached to the policy. The best part is that these investments grow on a tax-sheltered basis within the policy and can be paid out tax-free, along with the value of the policy.
You can enjoy level premiums for the rest of your life – Whole life policies generally come with level premiums for the life of the policy, which means the premiums never rise and as the policyholder you always pay the same amount.
Permanent life insurance policies have limited pay periods – With permanent policies, you don’t necessarily have to pay the premiums forever ad infinitum. This is because of limited pay periods, which may have you pay premiums for the first ten years of the policy for example and then never have to pay premiums ever again on that policy.
You may be able to participate in the profits of the insurance company – If you purchase a whole life insurance policy, you’ll be able to choose between a participating and non-participating policy. When it comes to a participating policy, these are called “participating” because they allow you to participate in the profits of the insurance company. You do this by receiving dividends as part of the investment component of the policy.
Those are some of the biggest advantages to buying a permanent insurance policy, but along with them come various risks, so the pros are not without the cons, which is where we’re going next…
Cons
Permanent life insurance is expensive – Permanent insurance is generally much more expensive than term insurance. Money Sense Magazine gives the following example comparing the price differences between term life insurance, universal life insurance, and whole life insurance: “A 35-year-old male non-smoker might pay $35 a month for a term policy with a death benefit of $500,000. A universal life policy with the same death benefit might cost $190 a month, while a comparable whole life policy could easily top $250.”
Most people cancel their permanent policies early – Permanent policies aren’t for everyone and most people underestimate their ability to pay the annual premiums and end up not being able to afford them. They usually bow out and, by doing so, lose out on the investment component anyway before they break even. According to an article in the Wall Street Journal, the Society of Actuaries found that 20% of whole-life policies are terminated in the first three years and 39% within the first 10 years. If you are one of these people, you are much better off with a cheaper term life insurance policy.
Very little of the first year premium actually goes into the cash-value account – One little-known secret is that advisors are given large first-year commissions to sell permanent policies, which total over half of the first-year premium. That means that very little of the premium actually goes into the cash-value investment account. Brian Fechtel, an agent who runs a website called BreadwinnersInsurance.com, recommended “blended” policies in the Wall Street Journal. These policies combine permanent and term components in a way that keeps costs down while still providing the tax-advantaged benefits of a permanent policy.
You shouldn’t really be thinking of insurance as an investment – Take it from this post by Gail Vaz-Oxlade: the investment component of permanent insurance shouldn’t really be your first priority when buying life insurance. As she writes, insurance is about risk mitigation for a “just in case” scenario and the investment component should always be secondary in the mind of the policyholder. That means you should be thinking about what the coverage amount is that will protect your family and not the return on investment.
Permanent insurance is inappropriate for short-term expenses – If you’re buying insurance to cover funeral expenses, a mortgage, a college fund, or any other short-term expense, then you’re much better off buying term insurance for a certain length of time. This is because these expenses will end and your coverage will no longer be needed once they are paid off. They are on a certain timeline, so the insurance to cover them should be too. Whether you choose a ten-year term, a 20-year term, or something longer like term-to-75. For most insurance needs, term insurance will have you adequately covered.
