Life’s Persistent Questions #2: What Type of Life Insurance Should I Buy?

By: Eric Sondergeld
7/5/2023Two of the most difficult questions consumers have when considering life insurance are What type should they get (such as term or permanent)? and How much do they need? If consumers cannot find satisfactory answers, they may forgo purchasing life insurance altogether.

All life insurance products can be categorized by whether the coverage can last for the rest of the insured’s life or not. The industry calls lifelong coverage permanent life insurance and non-lifelong coverage term life insurance. I’m choosing my words carefully here because words matter. They especially matter in how we describe products and in how we help consumers choose which best fits their needs.

Wants vs. Needs

Let’s start with that last word, needs. It is common for life insurance websites to list reasons for purchasing each type. These are often a combination of things consumers need and others they may want. Consumers who have arrived at the question of what type of insurance to buy presumably have already determined they might need life insurance. It’s important that the answers to their questions help move them forward in the process rather than stop them in their tracks. An oversimplification of what many websites say is that if you need coverage for the rest of your life, then buy permanent life insurance. Otherwise, consider term insurance. What if the consumer doesn’t know the length of time for which they need coverage? Could it be that in listing reasons to purchase one type or the other and the pros and cons of each, companies are raising more questions than answers, further complicating the purchase process?

The Words We Use Matter

It makes sense to describe different types of life insurance using adjectives. Permanent is an adjective. However, term is a noun (and can also be a verb). This inconsistency aside, are we using the best words to describe these two main categories of life insurance? Disability income insurance has a similar challenge with its two types: “noncancelable” and “guaranteed renewable.” Aren’t those synonyms?

Term is often described as temporary, which has the benefit of being an adjective. Technically, it means lasting for a limited time, which is true of term insurance. However, we typically think of temporary as short-lived. Examples include temporary jobs or temporary housing. Term insurance is described as typically available for 10 to 30 years. Would we think of a job or housing lasting 10 to 30 years as temporary?

Deep-Seated Opinions

Many people and organizations in the life insurance industry have an opinion that people are generally better off with one type of insurance or the other. Some of these opinions are philosophical, while others are financially motivated. Might it be those who have a strong belief in permanent insurance are more likely to use words like “temporary” when describing term insurance, a word that may raise concerns about the limited time a term insurance policy might last?

The Downside of Getting it Wrong

If someone needs life insurance, they are better off buying some insurance than none so that those financially dependent upon them will receive something in the event of the insured’s untimely death. I see two possible downsides in picking the “wrong” type:

• They purchased a smaller permanent policy than an equivalent premium would have afforded with term insurance
• They purchased term insurance, but die after the term policy expired and there was still a financial need

Types and Subtypes

Assuming a consumer concludes which type is a better fit for them, there are subtypes to consider beyond that, especially for permanent life insurance. Permanent subtypes include whole life, universal life, variable (universal) life, indexed universal life, and final expense insurance. All have unique and/or overlapping uses. Permanent policies are most likely purchased through some type of financial professional, who can help a consumer navigate the choices to land on a suitable recommendation for type, amount, etc. While there are different flavors of term insurance (such as yearly renewable term, decreasing term, etc.) most term products are for level (premium and face amount) term.

But I Want to Buy Online

There is a growing preference for purchasing anything, including all types of insurance, online. In a recent Society of Actuaries survey of U.S. adults aged 21-41, nearly half (48%) expressed a preference to purchase life insurance online.[1] Not only does this raise implications for how the industry makes its products available, but it also suggests that permanent products should be included more often for online purchase.

 

At the top of this post, I suggested the industry may be creating more questions than answers. I realize I have done the same. I hope that your answers will lead to better ways to help consumers answer their questions regarding what type of life insurance is best for them.

[1]Perceptions of Younger Generations on Risk and Insurance, Society of Actuaries, April, 2023.