The recent market meltdown actually aided the sales of permanent life insurance. Insurance agents are known for promoting permanent life insurance because of its key features such as the savings account supplementing the insurance policy. Safety has been the biggest part of their pitch because of the bond-heavy investing strategy that permanent life provides. Is permanent life insurance as good as agents make it out to be though? Many people have found that there are some drawbacks to permanent insurance that may make people think twice about getting locked in to a deal.
The Wall Street Journal published a very educational article called “Honestly, What’s the Best Policy” that exposes the pro’s and con’s of permanent life insurance. Since the market meltdown, many agents are heavily promoting the benefits of whole and universal life insurance plans while not revealing the high commissions that they receive as incentive to make these deals. In fact, most of the first and second year principle payment on a permanent life insurance plan actually goes to commissions and doesn’t reach a savings account. In past years, permanent life has been considered a bad bargain because of these commissions along with a slow accumulation in the savings account, but because of the recent economic situation, many agents are actually seeing a growth in permanent life policies. In 2010, term life insurance sales actually declined by 12%, while whole life grew by 2% and universal life actually jumped 21%. Obviously the promotion strategy of agents is working.
Quoted in the article, James Hunt, an actuary with the Consumer Federation of America, states that “term life is the lowest-cost way to get the most coverage for a shorter period, and it is easy to walk away from a policy if you find a better deal or your needs change.” Term life provides flexibility to edit insurance plans if need-be. It also is significantly cheaper than permanent life, which leaves plenty of cash to be invested elsewhere (instead of being locked into an insurance “saving account”). A popular approach that is highlighted in this article is to invest the money saved by taking term insurance and putting in a portfolio instead of paying the commissions to have an agent perform essentially the same action. Depending on the level of risk taken, this approach could prove to actually benefit the customer more and yield higher savings.
There are benefits to permanent life insurance, as given in a helpful table in the article. Earnings are built up tax-deferred which can be extremely beneficial to a person in a high tax bracket. Also, the policies are usually very conservative and bond-based which is a big aspect of promotion in recent years. But, one of the negative aspects of permanent life and is quite influential in the decision making process is that once a policy is taken, it can cost thousands of dollars to get out of. In fact, studies show that 26% of whole-life policies are ended in the first three years and 45% are ended within 10 years. Be careful when purchasing whole-life because nearly half of the purchasers do not make it until their death.
Overall, despite the economic situation, term-life insurance remains the best bang-for-your-buck and ultimately is the most prevalently chosen policy. Evaluate your insurance situation and decide for yourself what kind of policy is best, but be sure to be educated about the pro’s and con’s of both types of insurance!