One of the biggest debates in the life insurance industry is over whether it is a better financial decision to buy Permanent Life Insurance, such as Whole or Universal Life, or to purchase low cost Term Life insurance. The truth is there are valid arguments for both points of view. But it doesn’t have to be an “either or” situation.
Proponents of Whole Life often stress both cash value and permanent coverage. The cash value associated with a strong Whole Life policy can be very attractive if you hold the policy for at least two decades or more. The cash value growth usually can grow, at least partially, tax free and the risk of loss of capital is extremely low. So, when comparing Whole Life to investment alternatives, it is important to remember Whole Life’s advantages of tax free growth and high returns relative to the level of risk.
Universal Life usually does not have the same potential for cash growth as Whole Life insurance. However, like Whole Life, Universal Life does usually offer permanent coverage. Permanent coverage means that no matter how long you live, the full benefit will be paid out to your beneficiaries when you die. There are always expenses associated with the death of a loved one, so having a life insurance policy in place when you die can be paramount, whether your are 50 or 95 years old when you pass away.
A quick note on Variable Universal Life (VUL): VUL cash value is based on market performance usually does have significant risk of cash value loss. For the purposes of this discussion, permanent life insurance refers only to Whole Life and traditional Universal Life, not Variable Universal Life.
Term Life insurance, on the other hand, has one huge selling point when comparing to permanent insurance. Namely, it’s cheap. Many financial advisors will recommend to their clients that the best way to manage the risk of death is to buy Term Life insurance and invest the difference. The truth is many of us are not looking to squeeze out a few extra dollars to invest, but instead are looking to save money in order to pay all of our other bills. Additionally, proponents of Term Life also point to the concept that your need for life insurance often diminishes or even disappears over time, as a result of mortgages being paid off, kids finishing college, and retirement becoming fully funded.
While most consumers ultimately choose to spend less now and buy Term Life insurance, doing so exposes them or their families to a real risk of having the burden of significant costs down the road. This future burden may be in the form of buying life insurance again (at a much older age) after the term period expires, or if an individual dies after the term expires and did not replace the coverage, the family is left to come up with the money to pay for the costs associated with death.
For many of us choosing between the peace of mind of permanent coverage and the attractive pricing of term life can be a daunting task. However, there is an answer. Often times, the best solution is a compromise between the two options. This compromise is to “Ladder” a small amount of Permanent Life insurance on top of your larger term life insurance policy. This simply means buying two life insurance policies. For example, if you determine your life insurance need to be $750,000 to cover mortgages, the kids education, and retirement savings shortfalls; plus an additional $25,000 for final expenses, you can use the ladder strategy.
Here’s how it would work: You would purchase $750,000 of Term Life insurance. The term length may be 20 or 30 years based, for example, on the age of children, years left on mortgage, years to retirement, etc. In addition to the term policy you would also purchase a Permanent Life insurance policy in the amount of $25,000. The permanent policy could be Whole Life or Universal Life. Your choice of whether to purchase Whole vs. Universal permanent coverage would likely depend on your savings goals and your age.
Laddering Permanent Life insurance on top of Term Life, as shown above, is a terrific way to get the best of both worlds. By doing so you get to enjoy the low cost of term life as well as the sense of security that comes with knowing there will be a benefit paid no matter how long you live.
Finally, when looking to implement a life insurance laddering strategy, using an Independent Life Insurance Broker is a smart move. By using and independent broker you can use more than one carrier to facilitate your laddering. This diversification can mean significant savings, since the most competitively priced Term Life and the most competitively priced Permanent Life insurance usually are not offered by the same insurance company.