Some life insurance agents will tell you that buying term life insurance is a risky move compared to buying whole life insurance. This is not true. What is more important is to understand the purpose and uses of term life insurance. Term life insurance does have limitations, but these do not necessarily make it a risk to own over a permanent form of insurance. In fact, many experts recommend that the only type of life insurance that you should ever own is term life.
Why Term Is Called Risky
Before we can present the reasons why term life insurance is not actually a risk, it is helpful to first understand why some people may argue that term can be risky. These are the popular arguments.
- Term will expire. You do not want to die after the life insurance expires and leave your family nothing.
- Term does not have a cash value. Paying towards a term policy does not have any return for the owner, which is opposed to permanent forms of life insurance such as whole life which can give the owner a return on their investment.
- Because term expires, you may not be able to qualify for another life insurance policy if your health changes. You do not want to be caught in a situation where your life insurance expires and you do not have the option of obtaining more coverage.
Why Life Insurance Agents Make These Arguments
Life insurance agents generally make these arguments for one reason. They get high commissions for selling term life insurance, and they get very low commissions for selling a term life insurance policy. It is in their interest to convince a client to buy whole life insurance or variable universal life insurance because it makes them more money. Term life insurance is inexpensive for the client and as a result the agent is not paid highly on the sale of a term life insurance policy.
Why Term Is not Actually Risky
Taking these arguments one by one, these are the reasons why it is not actually a risk to buy a term life insurance policy instead of whole life.
Argument #1: Term Will Expire But Permanent Insurance Will Not, Leaving You At Risk Of Outliving The Coverage
Term life insurance does expire. Term life insurance is sold in lengths of 5-40 years, generally in increments of 5 years. After the policy expires, the coverage ceases and the death benefit is gone. The money you paid is kept by the insurance company. This is not the whole story, however.
Most People Do Not Need Life Insurance Their Whole Life
What is often misunderstood about term life insurance is that the insureds of term policies are meant to outlive the coverage time. This is what makes a term life policy so affordable to owners.
What many agents won’t tell their clients is that most people do not need life insurance for their entire lives. Most people only need life insurance until they retire, or sometimes not even that long. Life insurance is meant to replace the income lost from a pre-mature death. If the insured person no longer earns income, their death does not pose a great financial risk that needs to be insured.
Some people may be able to cease insurance coverage even sooner, for instance if the retirement of their spouse and themselves becomes fully funded, and there are no other major expenses to be funded such as a mortgage or child’s education. If an income earning member of a family passes away, but the family no longer needs that income to support their lifestyle, chances are they do not need any life insurance coverage.
Term life insurance is meant to be an affordable bridge which protects people until they can afford to no longer need the coverage. A policy that does not last for an entire life is not a risk in this case. Generally only a few select people need a permanent form of life insurance, such as people using it as part of a greater investment portfolio or those with estate taxes.
Argument #2: Term Does Not Have A Cash Value. Premium Payments Go To the Insurance Company and Are Gone If You Outlive Coverage
Permanent forms of life insurance do have cash values. They are usually meant to provide a positive rate of return for the owner over the long run. However, term life insurance is extremely inexpensive in most cases. Many times the coverage is less than $30 per month, even for larger policies. The amount that a client pays does not usually end up being very significant.
Buying Term and Investing The Difference Usually Nets A Greater Return, Faster
Also, perhaps more importantly, there is a concept known as buying term and investing the difference which refutes the idea that term owners end up losing money while permanent life insurance owners do not. Put basically, someone who buys term life insurance but invests the difference in cost between term and the equivalent whole life policy will end up with more money than someone who put the same amount of money in a whole life insurance policy. This is because the difference invested in the stock market should grow at much greater rates than the rate of return on a whole life insurance policy, resulting in a net gain to the term owner.
In fact, by purchasing term and investing the difference, most owners can save the same amount as the total death benefit by the time the term life insurance expires, negating the need for insurance coverage at all!
The other factor to consider is the surrender charges associated with permanent life insurance. An owner will not actually be able to surrender a policy for more than they have put into it for 10 years or more in most cases. Permanent life insurance usually will only have a positive rate of return only if it is held for a very long time.
Argument# 3: If Your Health Deteriorates You Will Not Be Able To Get Another Policy
Some people fear that if they have a major health issue while they have term life insurance, they are at risk of the insurance expiring without any ability to obtain a new policy. They feel that this is made all the more risky because someone with a health problem probably needs life insurance more than someone without a problem. Unfortunately for detractors of term life insurance, this argument does not hold weight.
Term Is Convertible
The first reason that this is a faulty argument is because term life insurance is usually convertible. This means that if someone needs to convert their term policy to a permanent form of life insurance such as whole life, they actually have a large window of time to change their term into whole life (or universal life or a VUL).
If an insured person has a change of health, or if they decide that they need a permanent form of life insurance for another reason, they can actually convert the term into another form of life insurance. This feature certainly lowers the risk of buying term.
Term Is Renewable
Term life insurance is also renewable. If the owner decides that they want to keep the policy in-force for a longer period of time, they normally have the option to renew the policy on a year by year basis after the term expires. While this does carry a larger annual cost than the original term coverage (because of adverse selection) it does give the owner the valuable ability to prolong the coverage.
Even Unhealthy People Can Get Life Insurance Today
There are also no underwriting (no health exam) policies available, as well as substandard ratings and life insurance companies who specialize in issuing policies to people who have issues with their health. Many people will still be able to obtain additional life insurance coverage if they need it, even with a health problem.
Owning Term Life Is Not A Risk
As you can see, it is not a risk to own term life insurance. Most people do not need life insurance coverage for their entire lives, and those that do have the ability to convert or prolong their term coverage.
The most important aspect of purchasing life insurance for most people should be the cost. This is why at Life Ant we believe in comparing costs from multiple providers and providing you with quotes from each. If you compare quotes from many companies, you can choose the policy that best fits your budget. To compare quotes for yourself enter your zip code above.