BAD COMPARISONS: Which is better? Term or Whole Life?

Written by Kyle J Christensen, March 16, 2022

Which screwdriver is better? That’s all I hear when insurance agents and securities reps argue about which type of life insurance is “the best,” with the focus almost solely on the premium and/or the “rate of return”.

“Which type of life insurance is better?” is really not the right question, at least when it comes to accomplishing anything of value. Anti-term advisors aren’t going to be convinced that term life is great. Anti-whole life advisors aren’t going to be convinced that whole life is better.

Just as specific screwdrivers are designed to accomplish specific tasks, the different types of life insurance are designed to perform different tasks, and honestly, aren’t very comparable because of that.

Yes, all life insurance has a death benefit. But, that’s where the comparison should end. Just like, all screwdrivers are screwdrivers. Just as it would be silly to say that a flathead screwdriver is better than a Phillips screwdriver, saying that one type of life insurance is better than the other is also silly.

Here are some better questions. What do you want to have happen? Do you want temporary insurance that will likely be cancelled before you die, resulting in you self-insuring with your assets? Do you know what the cost of self-insuring will be?

To get a better perspective, it can be helpful to ask the same question about self-insuring on other valuable assets that you have. Would you want to self-insure on your house once it’s paid off? Why? Or why not? What’s the cost of self-insuring on your house? Is it actually less costly to continue to pay for homeowners insurance than it would be to self-insure?

Sometimes, as good or useful as something may be, if you can’t afford it, you shouldn’t do it. The priority, when it comes to life insurance should be the amount of coverage, not the type. When a person dies, his/her surviving spouse doesn’t care what type of life insurance it was. There’s only one thing he/she cares about. The amount. So, term insurance may be the only or best option for the task of providing life insurance coverage. In my experience, almost everyone I’ve ever met should have some or all of their life insurance as term insurance for now. However, just as renting an apartment isn’t the long-term goal for most people, eventually owning permanent life insurance might make more sense. It’s not about the premium either. It’s about what you want to have happen. Just as the decision to own a house is not about the mortgage payment (by the way, is there anyone out there saying, “You should rent and save the difference”? – No!) In fact, most people pay a whole lot more when they buy a house versus renting. If the decision should be based solely on outflow of money, almost no one would ever buy a house? But that isn’t the sole (or even the main) deciding factor most of the time.

Going back to the better question, what do you want to have happen? Do you want to have permanent insurance, which is guaranteed to be there when you die? Guaranteed to replace your assets? Guaranteed to never change in premium? And because you have permanent life insurance you don’t have to self-insure using your assets (i.e. take the joint life option a pension or having the ability to spend the interest only from a retirement account). Do you want a policy that you have access to and use of all of the premiums you contribute to it throughout your lifetime?

I get why securities people don’t like life insurance agents. They (agents) oftentimes compare life insurance to investments, which is just as silly as comparing a hammer to a screwdriver. It’s just a bad comparison. Securities reps do the same thing, by comparing insurance to projected rates of return in the stock market. Again, a hand saw compared to a wrench.

The best way to choose “the right” life insurance for you is to figure out how you want to insure going forward, and stop comparing different tools. By the way, there’s never a “no insurance” option. If you have a spouse or significant other, kids, and anyone/anything else depending on you, you are going to insure, one way or another. Do you want to use temporary insurance, then transition to self-insure (using assets to insure – which restricts the use of those assets during your lifetime) or do you want permanent insurance which guarantees the replacement of your assets?

A Principles-Based Financial Planner can help you work through those scenarios so that you can come to your own best conclusion. If you don’t know any Principles-Based Financial Planner, message me and I can help connect you to one. If you are an advisor or financial planner and you would like to learn more about becoming a Principles-Based Financial Planner, message me.