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 the “rate of return”.
It’s 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. What a waste of time, and it’s really not the right question.
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 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 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? Would you want to self-insure on your house? Why? Or why not? What’s the cost of self-insuring on your house?
Sometimes, as good 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 with should have some or all of their life insurance as term insurance for now. But, just as renting an apartment isn’t the long-term goal for most people, eventually owning permanent life insurance makes 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! Because that’s a stupid idea!) In fact, most people pay a whole lot more when they buy a house versus renting. If it’s all about the payment, why would anyone buy?
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 bad 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, 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 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.