There are many financial professionals who swear that Term Life Insurance is really the only form of Life Insurance that anyone needs. In the States, Suze Orman and Dave Ramsey claim this. Canadian David Chilton has moved from loving permanent insurance to being a lukewarm endorser of buying only Term Life Insurance. So why do I disagree with these people. Simple, my experience in the industry tells me differently.
So before I get into the details, let me tell you what critics would say. Many people who advocate for Term Life Insurance argue that it is cheaper than Whole Life or other forms of Permanent Insurance; and, in the beginning, that is true. Term Life Insurance is usually meant to insure a person, couple or organization against the death of a specific individual for a period of time. While most term policies usually have terms of 10, 20 or 30 years, it is possible to have a term which is as short as 1 year or one which is as long as 100 years.
Accordingly, at the start, a Term Life Insurance policy is cheaper because that same policy only reflects the likelihood of someone dying. If one wants to grab the life expectancy statistics for the US, Canada and the UK, one will find that the likelihood of death falls just after birth and stays low through the average adult’s life. It is only at one’s 60th year does the chance of death match even come close to matching that of a newborn. Once there, though, it does skyrocket. Term Life Insurance consequently follows that same trajectory.
As an example, if I am 20 years of age and buy a 10 year Term Life policy, I can expect the policy to renew in my 30th, 40th and 50th year until the policy expires. The only catch is that at each renewal, the price of the policy will go up to match the likelihood of your death within the next ten years. So, Term Life Insurance starts off being very cost effective; but by your 80th year, it becomes almost unaffordable. As an example, BMO Insurance has a 10 year term plan. If he qualified, a 20 year old, non-smoking male could buy $500,000 worth of coverage for about $25.20/mth. However, by his 80 year, the same policy would cost $3,361.50/mth; and then the policy would expire 5 years later.
People like Suze Orman and Dave Ramsey argue that Permanent Insurance is only sold by agents because the commissions are better; and that there is little, or no need for, Life Insurance in the later years because you should have paid off your debt by then. Or put differently, Life Insurance is used primarily to protect young families from the effect of an unexpected death. So when your kids are older than you should not need life insurance. You should have paid off your car, your boat, your house and your kids should have moved out of your house. As you enter your prime income years, you should not need life insurance because you would have developed the assets to deal with the expected and unexpected events that life throws at you. However, experience and data tells me that that hypothesis is wrong.
The first time I saw the value of permanent Life Insurance was when I was in Toronto. I had been in the industry a short time and I visited a SunLife Client. This client had a policy that had been paid up (i.e. the policy was in force, but had no premiums to be paid on it) and I was wondering how I might be able to serve this particular client. For the purposes of this conversation, let’s call him “Adam”. Adam had had a good life. He owned his own home in a new community, had no debt, some savings and an investment portfolio. However, what Adam really wanted to do was to give his grandchildren a good start in life: Adam wanted to provide them each a nest egg. However, Adam had a simple problem: his savings and investment portfolio were not nearly big enough. He simply wanted some insurance to fill the gap.
But, there were two things holding Adam back. The first was his choice of product. While Adam had bought a small whole life policy when he was young, he had subsequently bought a non-convertible term product from a company called Primerica. The term product was cheap when he bought it, but now in his early 70s, the insurance premiums were too high and they would only get higher. Adam wanted options so that he could maintain even a modicum of coverage.
If the client had been with another company, the Term Life Insurance product could have been convertible. This means he could have changed part or all of the term insurance without any medical questions. It is a right provided by many Canadian Insurance Carriers and it is part of the power of a good Term Insurance plan. Consequently, while Adam would have significantly reduced coverage, at least, he would have a level of coverage that he could maintain. However, Adam had purchased a term insurance product from Primerica. That meant that while Adam had a strong insurance coverage, he couldn’t convert it. Therefore, Adam had two choices: pay an increasingly unaffordable policy (in whole or in part) or cancel that same policy.
Now some might suggest that I could have sold him a new policy. That might have been true if Adam’s health had not changed; and that brings us to our second problem. Adam had a TIA (ie. a mini-stroke) some time after the issuance of the Primerica policy. This health condition meant that if he could qualify for insurance it would be really expensive. We talked about possible premiums of a new plan and he decided that he would eventually cancel the Primerica Policy and move on from there.
What did Adam’s story tell me? People’s life circumstances change. It is not always easy to see that when one is 20, 30 or 40; but it does happen. I have been thanked by more than one client when it comes to my recommendation of a permanent insurance solution. As individuals, we rarely like to think about what will happen to us 20, 30 or 40 years from now. Sometimes, we have children that we never expected to have. This can happen because you find the right person or you have adopted a child due to accident or illness. Sometimes, you get unexpectedly married or divorced. Life has a way of throwing curve balls and it is difficult to see those particular curve balls coming in any particular life.
However, if we look at the aggregate date of many lives, we can see the peculiarities. For example, Pascale Beaupré, writing for Statistics Canada (in an article called “I do… Take two? Changes in intentions to remarry among divorced Canadians during the past 20 years”), noted that:
“According to General Social Survey (GSS) data, divorced Canadians represented 7% of the total population aged 15 and over in 2006. In fact, divorce affects more people than what recent data leads us to believe: about 13% of Canadians aged 15 and over had experienced at least one divorce during their conjugal life, and nearly half of them had remarried.”
In the same piece, Pascale noted that divorces have increased, common-law unions are much more popular and many children are born outside of marriage. So it is not crazy to think of a parent needing insurance in their 50s, 60s or 70s because their parental responsibilities have not ended. Or more broadly, I have just highlighted one reason why there might be an insurable need long into one’s senior years.
Now, I don’t have to think hard to find different circumstances in which Life Insurance, in your later years, can be helpful. From asset transfers to bankruptcy, from business acquisitions to pandemics to terminations; Life Insurance allows people, families, charities and corporations to lessen the risk of mortality and morbidity. As our life changes, Life Insurance becomes an even better way to protect our families, communities and ourselves. As social circumstances change, Life Insurance will be needed for longer and longer periods of time. Accordingly, in my opinion, it is easy to see two things: Term Insurance can be a more expensive insurance solution and that there is a value for Permanent Insurance.
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