Should You Get a Perm?
Term or Perm?
Most insurance protects you from something that could happen. Enough people keep paying without having a loss, some people stop paying, and hopefully there’s enough to cover all the losses with some room for profit. Your cost will depend on how likely that thing is to happen to you, during the period you’re covered. Pricing risk correctly is how insurance companies make money.
How about for something that is inevitable? Everyone will die someday. The premiums set for permanent life insurance need to be different (higher) than insurance for a possible loss. That also means that insurance companies assume that some people will let policies lapse, the math can’t work otherwise.
Everyone’s situation is different and there are certainly reasons why a permanent policy might make sense, but it is crucial to understand how the policy works, why it is in your best interest, and how the person who is suggesting it gets compensated. Some of the biggest commissions in financial services come from permanent life insurance[i], while the industry is making strides to improve transparency and reduce or eliminate conflicts of interest you should be aware that incentives could be influencing a recommendation.
In many cases, the need for life insurance is temporary during high earning years or while paying off a mortgage. Term policies can often provide the highest death benefit at the lowest cost for a fixed period. There will always be final expenses but in many cases having term for the years that you would need income replacement and enough liquidity to cover final expenses can be sufficient while permanent policies can be costly or potentially lapse if you don’t continue to pay premiums.
Having the proper amount of coverage is incredibly important but it depends on many factors such as age, health, marital status, children, debt, income, family medical history, profession, hobbies, business interests… the list goes on and on. Without a life insurance needs analysis specific to your unique situation the premiums you’re paying may or may not provide the amount of coverage your beneficiaries would need.
There are a number of ways to estimate your life insurance needs. You can do your own research or find tools online to get a ballpark estimate of your needs. You can talk to a professional, just always be aware of how they are compensated and if there are conflicts of interest. There are also general rules of thumb like multiplying your annual income by the number of working years you expect to have.
Anyone with a temporary need for life insurance should consider a basic policy. Basic policies are ideal when there are certain stages of your life where people depend on your income more. Young parents are a classic example of people with a temporary need. A term policy that will pay a benefit if something were to happen while you’re raising your kids or still paying off the mortgage might be perfectly sufficient. Basic insurance can also be used for other long-term debts aside from just a mortgage.
It is also important to note that people who have kids, own property (especially with a mortgage), or own businesses generally speaking have greater needs for life insurance than those who do not.
The major benefits of basic life insurance are simplicity and cost, the downside is it’s temporary and does not build cash value. Fortunately, many people have temporary needs for life insurance at certain times of their lives and this is an inexpensive way to offer that specific type of protection.
I don’t see the lack of cash value as a downside but it’s worth mentioning as some people feel the lack of it could make basic insurance premiums a waste of money. I would argue that unless you have a permanent need for life insurance any premium paid for something besides a death benefit was not the optimal use of capital.
Remember, insurance companies are in business to make money, and most insurance is for things that may happen. There are absolutely legitimate reasons for permanent life insurance, but you must understand if any apply to you. Mortality is scary, insurance can be confusing, incentives can be problematic. You don’t have to let these things cloud your judgement; but you must take the initiative to be an informed consumer, and we’re always here to help.
(Image was generated with the help of AI)
