Permanent Life Insurance: The Best Coverage for the Short Term?

“Prediction is very difficult, especially about the future.”
-Neils Bohr, Danish Physicist

The Challenges of Choosing Life Insurance

Should you buy term insurance, permanent insurance (also called whole life or cash value), or both? It’s a major financial decision everyone must make. And one of the challenges in buying life insurance is that you have to make a decision regarding an unknown future event which could occur as soon as tomorrow, or 50 or 60 years in the future.

Since the particulars of life are constantly changing, the odds are high that your financial decisions will be modified at a later date. In this constantly changing environment, how likely is it that a life insurance program established years (or decades) ago will still fit today’s needs?

Many consumers end up repeatedly changing their life insurance coverage, just as they make other adjustments to their financial life. They drop existing coverage, change policy types, switch companies, add or subtract benefits.

While these changes may be reasonable based on current circumstances, they may not be financially efficient. If a change in life insurance represents a “new beginning,” there’s a strong possibility previous life insurance decisions resulted in financial waste.

Some might say this financial inefficiency is to be expected with all insurance. People pay premiums for protection against an event they hope will not occur – an accident, fire, theft, or illness. If things go well, nothing bad happens, and the money spent on insurance is “lost.” The expenditure did not provide a benefit, other than peace of mind. And since the best-case return on insurance is a financial loss, the primary financial objective is to find the lowest rate to minimize anticipated losses.

But life insurance is a unique financial product with different parameters, so focusing exclusively on the lowest rate is not always the best criteria. Because of these differences, what some consider the most “expensive” type of life insurance may deliver the best benefits – over a lifetime and in the short term.

The basic concepts of life insurance are fairly straightforward: A policy in force at death will deliver a cash benefit to beneficiaries. The applicant’s good health is a qualifying factor in securing coverage. These components aren’t much different than other types of insurance. But there are other considerations unique to life insurance.

First, everyone dies. You may never have an accident, your home may never burn down, but mortality is a certainty – it’s just a matter of when. So if you’re going to buy insurance for something you know will happen, it makes sense to structure the coverage so that a lifetime of premiums can be recovered by the inevitable claim. (Even better, you can structure life insurance so that you are likely to enjoy benefits yourself!)

The cost of life insurance increases as people age, because insurance companies have a shorter time to accumulate the reserves needed to pay death benefits. In addition, future good health is not a given. Both these factors provide incentive for consumers to obtain life insurance sooner rather than later.

But in order to keep a life insurance benefit in force until death, policy owners are faced with the possibility of years, even decades, of premium payments. In light of the other financial changes that are certain to occur, keeping life insurance policies in-force can become problematic. Regular premium commitments may not match an up-and-down financial life.

This tension between the desirability of securing coverage as soon as possible and the logistical challenge of keeping it in force for a lifetime often makes it challenging for households to construct a life insurance program that delivers protection today and maximum benefits over time. In response, the life insurance market provides two basic options: term insurance, or permanent/whole life insurance that builds cash value.

Term vs. Whole Life Insurance: Which is Right for You?

In regard to initial premium outlay, term insurance is definitely less expensive. But term insurance is a limited contract; the premiums paid provide a death benefit only during the specified term (10 years, 20 years, etc.). If you don’t (or can’t) pay a premium, the coverage ends. If the term expires, you may re-establish coverage at a higher rate, but might be required to undergo a new health evaluation. With most term polices, there is no refund of premium (those that offer this feature do so by increased premiums).

In contrast, permanent or whole life insurance is a financial product with options, choices, and the capability of adjusting to changing circumstances. Unlike term, whole life is designed (and priced) to provide an insurance benefit for a lifetime, not just a 10- or 20-year period.

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Taking Turbulence Out of the Long-Term Care Insurance Issue

When Prudential Financial announced on March 7, 2012 that the company would stop taking applications for individual long-term care insurance on March 30, the news meant that 10 of the top 20 long-term care insurance companies by sales had left the market in the past five years, according to a March 10, 2012 Wall Street Journal article. The insurance companies will continue to pay long-term care claims on policies currently in-force, but many of these policyholders may encounter premium increases in the future.

These exits from the long-term care insurance market might seem curious, considering that long-term care is becoming an increasingly important financial issue in retirement. If anything, the demand for long-term care has increased. But based on a range of comments from insurance industry observers, insurance companies are rethinking how to package and price long-term care coverage.

Long-term care is a relatively new insurance product (the first widely-marketed policies were issued in the 1980s), and a combination of economic, medical and consumer behavior assumptions have diverged from companies’ initial actuarial projections.

In order to maintain adequate reserves to pay claims, insurance companies are required to invest a significant portion of their assets in conservative, safe investments. In the current economy, these safe investments have been delivering historically low yields.

According to a March 7, 2012, Bloomberg News article, the low returns exacerbate another issue: The costs and circumstances of long-term care are different than the projections of 20 years ago:

Not only did insurers not predict that Americans would be living longer when they began writing long-term care policies in the 1980s, they also failed to project the cost and scale of care around disabling maladies such as dementia. That in turn led to policies being severely underpriced for years, insurance advisers say.

Most long-term care insurance policies include a provision that premiums may be increased to meet future long-term care claims. Typically, this provision applies only to policies that have been in force for a specified number of years, usually 5 to 10 years. In the recent past, some of the premium increases have been substantial (around 20 percent).

One of the possible responses to increased premiums that actuaries factor into their pricing models is that some policyholders will drop the coverage. But a high percentage of long-term care policyholders have maintained coverage in spite of premium increases. Why? As Malcolm Cheung, vice president of long-term care for Prudential told Bloomberg, “People value the coverage and protection.” Cheung’s comments reinforce the conclusion that long-term care is a significant financial challenge and the insurance is valuable; having made the investment to obtain coverage, most policyholders do not want to forfeit it.

For some insurance companies, these invalid assumptions about the economy, medical history and customer behavior have prompted them to step away, and take a breather, and reassess the way they want to do business. And it may be awhile before some clarity emerges about the most effective way for both customers and policyholders to deal with long-term care. But for many Americans, waiting for “clarity” about long-term care is not a reasonable approach; they need to address long-term care now. So, despite the current turmoil, what actions can be taken today to provide financial certainty in the face of what could be a serious shock to one’s standard of living and well-being?

Apply for coverage now. It may seem counter-intuitive, but in the midst of this uncertainty, there can be advantages to buying coverage now. As one brokerage company noted in its March 7, 2012, blog:

When a large life insurance and long-term care insurance company decides to stop selling individual long-term care insurance because it does not view the sales as profitable, the message is that the consumer is receiving significantly the best end of the bargain.

Most industry analysts expect the underwriting criteria for LTC will eventually get stricter, making it harder to obtain coverage. The reality: Younger, healthier applicants who apply under more generous guidelines have a much better chance of obtaining coverage on favorable terms.

Use a paid-up plan. Some insurers offer the option of paying higher premiums for a specified period of time, typically ten years. Once the paid-up period is fulfilled, no more premiums are required, and the coverage remains in force for the life of the contract. This feature eliminates the possibility of premium increases and locks in the benefits, making long-term care costs a known quantity in your financial plans.
Make long-term care part of your life insurance policy. Many life insurance policies now offer an accelerated benefit rider, which permits a percentage of the death benefit to be paid in the event of certain long-term care events. While this coverage is typically not as comprehensive as a true long-term care insurance policy, it does have one advantage: If you don’t need long-term care, the premiums will be “recaptured” by your beneficiaries when the death benefit is paid.


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Checking (and fixing) Your UNIVERSAL LIFE POLICIES…

“The future ain’t what it used to be.” – Yogi Berra
(This article is a bit on the technical side, but understanding the concepts could be important.)

Universal life (UL) is a type of permanent life insurance policy introduced in the early 1980s. Some of the features of UL were quite innovative, but because of the economic climate in which UL was introduced, the true long-term impact of these UL innovations is only now becoming understood. Since many long-term owners of UL policies are just now coming to grips with these issues, it is important to

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An ongoing philosophical debate in the financial services community is how financial professionals should be compensated, either by commissions or advisory fees. Both sides of the discussion raise some interesting issues. Those advocating a fee-based approach argue that the incentive of commissions for brokers and sales agents has the potential to cloud the assessment of any transaction. In contrast, those defending the commission-driven model assert there is greater incentive to actually implement and monitor financial transactions, while fee-based planners have little or no motivation to ensure that the customer actually follows through on the advice given.

Since both sides are fairly well-entrenched on philosophical grounds, it is perhaps surprising to read a practical, real-world perspective on how to obtain reliable financial advice, particularly in regard to life insurance.

Errold F. Moody, Jr., operates and maintains what he claims is “the largest and most comprehensive planning site on the Internet” ( For more than two decades, Moody’s major interest has been “individual fee financial planning.” It is Moody’s contention that the best way to retain the services of financial professionals is by paying for their advice as opposed to buying their products – except when it comes to life insurance.
Moody’s exception is because he observes that many fee-based planners don’t seem to know much about life insurance. Besides personal experience, he quotes a 1999 Journal of Financial Planning article which stated:

“…many planners were not looking at, or least not emphasizing enough, the entire area of risk management – not just life insurance, but also disability, health, long-term care and liability coverage.”

Moody follows with some commentary of his own. (As you read this, keep in mind that for the past 24 years, Moody has been a professor at the University of California, Berkeley and Irvine, taught classes for Professional Designations in Financial Planning, and from 1995-2004, he was an Insurance instructor for various licenses and continuing education programs.)

“Insurance is, in my mind, one of the most difficult of all planning areas. While it is easy to get information about mutual funds and other investments from the likes of Morningstar or Value Line, it is almost nigh on to impossible to obtain objective and intensive analysis of a life insurance product. Therefore, since the analysis is hard, and since very few planners have the capability to do such analysis, they simply have decided to effectively eliminate planning for that area in total. Therefore, while somebody may have limited the conflict of interest in regards to commission, they simply have paid an hourly or flat fee for an incompetent, unknowledgeable adviser who has effectively breached its [his/her] fiduciary obligation to a client.”

Thus, Moody concludes the only effective way to buy life insurance is from a knowledgeable agent.  Setting aside questions of compensation, the real issue is the financial professional’s knowledge of insurance, and ability to accurately transmit that information to the consumer, then deliver the appropriate products. Because of the variety and complexity of life insurance contracts, you need to work with someone who is immersed in the business. And the most likely “expert” is a life insurance agent, whether compensated by commissions or fees.

Need insurance advice, or a review of your current policies? Give Partners for Prosperity, Inc. a call at (877) 889-3981, ext 120; we’d love to help.

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As a parent, spouse, employee, you have a unique human life value to others. While much of the value you bring into these relationships may not be financial, or even financially quantifiable, a life insurance policy allows you to monetize your human life value when you are no longer there in person. When you obtain life insurance, you have monetized yourself.

The group, Financial & Tax Fraud Education Associates, is a non-profit organization that operates a website ( devoted to exposing fraudulent business financial and taxation practices. In the middle of a commentary on the potential abuses in life settlements (agreements where a private investor buys an existing life insurance policy from the insured in exchange for becoming the beneficiary), are several interesting comments on the “hidden asset” of insurability.

“(W)ealthy people have a hidden asset, which is their insurability. The [homeless person] at the bus station can’t qualify for $5 million in life insurance, but many affluent and nearly affluent Americans can. Whether buying a lot of insurance makes financial sense for a person depends on a lot of factors, including their age, health, and what the internal rate of return will be. But when it does make sense, wealthy people should be taking advantage of their large insurable interest by purchasing as much life insurance as they can reasonably afford so as to either pay estate taxes or to further grow their estate (income tax free) for their children.

This comment reflects the philosophy of coordinating the monetization of assets concept mentioned in the previous article. The author further states that monetizing one’s life is even worth borrowing for…

“If the wealthy people were really smart, they would simply buy as much life insurance as they could and hold it until their deaths. If they didn’t have the cash on hand to buy it, they could always use the services of many lenders who are willing to finance the premiums with the loans being paid out of the policy proceeds at death.

Most people might not think of borrowing to obtain life insurance, but borrowing is certainly a monetization strategy, and for some people, the benefit of monetizing their human life value/insurability may outweigh the cost of borrowing.


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“Either-Or” Fixations in Life Insurance: Are You Missing the “C” Option?

Steak or lobster?
Dogs or cats?
Ginger or MaryAnn?

Why do some people insist on turning every issue into a black-or-white, either-or decision? In theory, this mindset might simplify one’s life (or simply provide time killing conversation at the local watering hole), but most of the time an either-or approach is neither necessary nor desirable; quite often, finding a “C” option is much better than choosing Option “A” and rejecting Option “B” (or vice versa). Hey, why insist on diners having to choose between lobster or steak when they can have surf and turf, right?

The either-or mentality shows up with some frequency in financial commentary. For example: Stocks or bonds?   Pre-tax or after-tax savings?    Group or individual benefits?

Looking at these “A” or “B” sample issues, it should be obvious that “C” options are both available and practical. A balanced portfolio usually includes a mix of investment vehicles, not just one type. Pre- and after-tax savings plans each serve important functions in individual finances, depending on when the accumulation might be needed. And a blend of group and individual programs can provide customized security at an affordable price. Despite an attention grabbing either-or headline, the answer to most “A”-or-“B” financial questions is usually “C” – “both.” But what about this question:  

Permanent or Term life insurance?

A quick survey of opinions about life insurance (in financial publications, at bookstores, on the Internet) finds mostly a polarity of opinions; it’s either “A” or “B,” permanent or term. “C” options, those that might recommend both permanent and term, can hardly be found. But considering how many other financial issues seem to include practical “C” options, why is the discussion about life insurance so polarized and dogmatic? There are several possible explanations.

Why people can’t seem to find the “C” option for life insurance

Permanent policies are complicated. In comparison to other financial products like stocks, bonds and mutual funds, permanent life insurance can legitimately lay claim to being the most complicated and multifaceted financial instrument available to the general public. This complexity is not only because permanent life insurance consists of a blend of savings and insurance benefits, but because different contract formats allow for an endless variation in how the cash values and insurance features can be combined to meet individual desires.

There is no uniformity in the evaluation process. How does an individual determine the financial value of life insurance? This is a challenging question, one in which there is very little consensus. For example: In a net worth statement, what is the value of a life insurance benefit? Until the insured has died and a claim has been paid, there is no recognized dollar value (for a term policy). Yet having life insurance certainly results in greater financial security. Because of the difficulty in quantifying the financial value of life insurance, the methods of comparing and evaluating life insurance are numerous, reflecting a broad range of financial philosophies. 

Even for term insurance, where the typical method of evaluation is price (the lower premium is considered the best value), other factors come into play. A 10-year term policy will almost certainly be cheaper than a 20-year term, but what about the cost of maintaining or re-insuring when the term expires, especially if one’s health changes? How can one accurately assess this factor from a financial perspective?

In some evaluations, critics of permanent life insurance will point to low rates of overall return in comparison to other accumulation vehicles. Yet permanent life insurance isn’t just an accumulation vehicle; the life insurance benefit is part of the package as well, and the two components are interrelated. How accurate is an evaluation process that attempts to separate what was intended to be combined?

There are commissions involved. Almost all life insurance is provided by agents who receive commissions from insurance companies when they help an individual obtain coverage. Permanent policies have larger premiums, and larger premiums mean bigger commissions. For some observers, this commission arrangement creates a conflict-of-interest for agents, in that they may be induced to recommend higher premium policies that are perhaps not suitable for consumers. Another frequent critique of permanent life insurance policies is that the agents’ commissions come at the expense of greater cash values for the policyholder.

Over the past few decades, the combination of complex products, poorly defined evaluation processes and implied potential for a conflict of interest over commissions has led many public “experts” to offer this advice: “Just get term insurance. It’s simple and cheap, and you won’t have to worry about getting ripped off.” In response, knowledgeable commentators within the life insurance industry often feel compelled to focus on strategies that justify permanent policies for almost every scenario, both to explain their products and defend their integrity. In a way, the strong philosophical differences about how to view the two forms of life insurance have left little room for discussing ways to make them fit together. Yet there are many workable formats for making life insurance a product with “C” options.

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