July 28, 2017

Permanent Life Insurance? Level Term Beats Whole Life

This entry is part 3 of 5 in the series Ask an Adjuster Your Insurance Questions

I handled 1099 exchanges for Executive Life Insurance for a year.* I calculated cash value and death benefit amounts vs rollover premium amounts. Level term beats whole life insurance, sometimes called permanent life insurance, dollar for dollar.

A reader asks about permanent life insurance: “My husband, 32 and I, 30 are looking into life insurance. Can anyone inform me which company or web pages we can work with to acquire information? There are so many out there… wouldn’t know where to start. Who do you personally use? Is there a medical exam involved? What type of premiums are you paying? Is it fixed or will it go up every couple of years? We live in Florida also. Any help would be appreciated.”

My Answer:

How Much Premium

While my husband and I owned our home, we had life insurance through Old Mutual (OM) Financial Life Insurance Company 1001 Fleet Street Baltimore, MD 21202 1888-513-8797. We were in our early forties when we got the life insurance policy in 2005. We paid about $50 per month in premium, for two of us ($25 each). The death benefit was $150,000. The loan on our house was for about $200,000. We figured whichever one of us survived could refinance with the $150,000 and afford the remaining $50,000 loan balance.

Medical Exam

We did have to get medical exams, but they were performed by a doctor of our choice. We are both non-smokers. We both have some minor health issues, so we were not paying the lowest premium possible.

Regarding Premium Increases

This was guaranteed level term life insurance, which is the only kind I would buy through a commissioned sales person. Almost all the premium goes toward your death benefit with level term life insurance. The premium remains the same for the guaranteed period. In our case this was 20 years.

Term Insurance vs Permanent Life Insurance

There was an option to get all our premiums back at the end of the 20 years, but this increased the premiums, so we declined this option. The idea behind term life insurance is there are no frills. You pay your premium for each one-year term. If you die during a term for which you paid premium, then your beneficiary gets the death benefit. Period. No cash value. Term life insurance is not an investment. Whole-life insurance, sometimes called permanent life insurance, is more geared toward an investment. Most people are better off with guaranteed level term life insurance, in my opinion. Dave Ramsey agrees with me, although he confuses the guaranteed period of twenty years with the premium term of one year. There is more to my answer beneath Dave Ramsey’s video.

Video: Dave Ramsey Life Insurance Explained – Slams Whole-Life

Dave Ramsey explains why whole-life insurance is usually a rip off, and that most families just need guaranteed level term life insurance. He also gives his usual speech about how the only acceptable debt is a mortgage, and families should be completely debt-free, including the mortgage, by the time the kids are grown. The Suze Orman video that follows also agrees with what I have set forth on this page.

Who needs life insurance?

The point of life insurance is to help your spouse or your kids pay your debts without your income, should you die. If you don’t have kids or a mortgage, in my opinion you don’t need life insurance. Also in my opinion, a mortgage is the only acceptable debt to be in.

Annuities as Retirement

That said, as part of my Individual Retirement Account I do have an annuity. Normally I am against annuities. Most of them are full of fees and commissions. However, I got my annuity through USAA Investments, where all the salespeople are on salary. I don’t pay any fees or commissions. My annuity is not really being used as insurance. I am using it to help plan my retirement.

Finding Your Life Insurer

As to which company or web pages you can work with to acquire life insurance in Florida, start with your yellow pages. Find an insurance agent near you and go visit them or invite them to visit you in your home. Once you know the name of the insurance company they represent, look it up on the website of your state’s department of insurance to make sure it is a reputable company. You can use my example of what we were paying as a ballpark guideline on how much premium is reasonable.

*I worked for Executive Life Insurance as a policy analyst from 1984 to 1987, before I went off to UC Berkeley. Shortly after I left, the company went bankrupt. It had over-invested in junk bonds. I was foolish and invested in permanent life insurance through First Executive Corporation while I was working there. My $1,000 premium was supposed to turn into a $200,000. death benefit with $100,000 cash value by the time I was 65. Today, Aurora Insurance owns my permanent life insurance policy. It has a cash value of $100.

No matter what a company promises you, remember that companies can claim bankruptcy just like individuals can. Have realistic expectations.

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