Advisors must dispel misconceptions when comparing term and whole life insurance
While even new clients seeking advice on life insurance may have some basic knowledge, it’s important for advisors to walk them through the term-versus-perm decision and make sure they’re not working with false premises.
That was the point made by Erica Davis, senior marketing specialist at United Life, in an article on InsuranceNewsNet Magazine. She noted that because of advice from semi-famous authors and media personalities, many assume that term life insurance is absolutely the best option.
“It certainly may work well for many scenarios, such as paying off a mortgage or other debts, covering key persons in a business, or protecting incomes when budgets are tight during the client’s early working and child-rearing years,” she said, stressing the importance of considering people’s individual needs.
Commenting on people’s perception of whole life insurance as a “rip-off,” Davis acknowledged that whole life premiums are higher than term premiums, particularly for policies with large coverage amounts. But clients must understand that unlike term plans, whole life coverage provides guarantees, living benefits, cash value build-up, and nonforfeiture options. “It allows the owner to make changes later, should they decide to discontinue paying ongoing premiums,” she added.
She also addressed a widely quoted statistic that fewer than 1% of term policies actually result in a death claim payout. Citing a LIMRA representative, she said the statement was probably made at the University of Pennsylvania in the 1960s, and there’s no published statistic at the moment to support the statement. Combing through 30 years of data from her own company, she found rates of death claims for term policies at 3.4%; universal life at 11.8%; traditional whole life at 15.3%; and single-premium whole life at 63.9%.
“One could glean from these figures that permanent life insurance is significantly more likely to pay out a death benefit — but this does not mean that term insurance is a bad idea,” Davis said.
To ensure more fitting life insurance recommendations, she said that needs analysis tools and software programs shouldn’t boil people’s needs down to one grand total. Instead, there should be two categories:
- Short-term needs, which include income replacement, mortgages and other debt, children’s college education expenses, and an emergency fund; and
- Long-term needs, which consist of funeral expenses, funds to cover anticipated estate taxes, and final legacies for heirs and/or charities.
“A strategy to consider is to start with a large term policy, with plans to convert it to a smaller permanent policy later (as long as there is a conversion option provided on the term plan),” she said. “Make the client aware that when converting from term to permanent later, the rates for the permanent plan will be based on an older age, resulting in a much higher premium. Locking in permanent coverage at a younger age also locks in lower rates.”