How to Choose Between Term Insurance and Permanent Life Insurance? The Youngest Son Replies.

A Family Discussion is Completed (click here for Part 1, and here for Part 2)

“How to choose between term insurance and permanent life insurance? That is the question you are going to ask me now, Father, isn’t it”

The young man looked expectantly at his father as he approached the kitchen table. His father had been sitting quietly, enjoying his late afternoon tea. As the youngest son, he had found the path down which family discussions flowed. His father would initiate one with his oldest brother, and then proceed to the middle brother. When a point of mutual understanding had been reached with each, the discussion would then culminate with him.

“Yes,” his father said. “The time has come. However, you had not been available when I took my afternoon tea. It would have been nice to sit and drink together.”

“Yes it would have been,” the youngest son replied. “But it is a beautiful night. Will you join me for a walk?”

His father looked at him with some contemplation, and then arrived at a decision. “It is a good idea,” he replied, as he rose from the table. “There are many ways for people to connect.”

Father and son left their home and strode into the cool night air. The moon was full, and its brightness illuminated the homes along the block. The youngest son was eager to speak, so he initiated the conversation.

A  Family Heritage of Understanding Finance

“I appreciate all you have taught me about business and finance, Father,” he started, “and I am grateful for the counsel of my elder brothers. My education has allowed me to arrive at an answer to this question quickly and efficiently.” He nodded his head in emphasis.

His father raised an eyebrow in some surprise. “To arrive at an answer to a big question in a small amount of time can be risky. There is a chance that not all factors involved will be considered sufficiently.”

His son smiled at him. “It all depends on one’s level of confidence,” he stated. “I believe with all due modesty that I have figured out how to make this decision.”

At this father his father stopped walking and turned to him. He had an incredulous look on his face. Finally he spoke in a low but serious tone.

“I would very much like to hear your thinking, my son,” he said. “Please share it with me.”

Is Life Insurance a Commodity?

The youngest son turned his body as well so they were now facing one another fully. “It is simple for me, Father,” he said. “Life insurance is a commodity. One buys it as one needs it, as with any other commodity.” He waited for his father’s reaction.

The senior man showed no emotion on his face, and said cautiously, “Please continue.”

“When I need life insurance for my family, I will buy it. When I have a mortgage that I need to protect, I will buy it. When I become concerned about securing the educational funds of my children, I will buy it.”

“It is a big marketplace,” he said, in completion of his thought. “I am sure that any time I have a need for life insurance, a company will be interested in making me an offer.”

In reply, his father followed his logic. “So,“ he said, “if you start a business and take out a loan, you will buy the policy then. If you take on a partner and need to fund a buy sell agreement, you will buy the policy then. If you hire a key person and need to cover him, you will take out a policy then.”

The youngest son began to reply, but his father raised a finger for him to pause.  “And when you retire and need to maximize your pension distribution, you will take out a policy then. If family members unfortunately become dependent on you, you will take out a policy then. When you decide to make a charitable gift, or leave a legacy to your estate, you will take out a policy then.”

“You will just keep buying policies as you need them, as someone buys cars or clothes. Is that what I am to understand from you?”

The youngest son was taken aback by the sharpness of his father’s rebuke. He did not feel that he deserved such a response, but was careful to keep his emotions in check. Nonetheless, he did respond with emphasis.

“That is exactly right, my Father. The question of how to choose between term insurance and permanent life insurance is not complicated. I will simply buy a new term policy every time I need more coverage.”

“Now, I know what is your concern,“ he smiled assuredly. “You are thinking that if I keep buying a new policy at an older age, I will have spent more money overall than if I had brought a larger policy at a younger age. Am I right?”

Noncommittal, his father waited for him to continue. “I want you to know that I too am concerned about overall finances. For that reason I am making a strong commitment to investing my money. I am 100% certain  of this: with my understanding of investments, I will earn much more money buying term and investing the rest, than I would have saved by locking into a rate for permanent insurance at early age.”

When “Buy Term and Invest the Rest” Will Not Work

His father shook his head. “Nobody denies you your ability to commit, my son,” he replied, “You are disciplined, you are economical, and you have integrity. When you say you will do something, you do it.”

He began to walk, and his youngest son joined him. The fullness of the night had arrived, and there was a quiet in the street. It seemed as if their conversation was the only – and so the most important – event taking place in the neighborhood.

“But my son, your estimation is falling short. There is one factor in your thinking that you have underplayed. It happens to be the most important factor when deciding how to choose between term insurance and permanent life insurance. And that is mortality.”

For the first time, the youngest son seemed perturbed. His confidence had dropped a bit. “Please explain, Father. I do not want to miss an important consideration in my thinking.”

Underwriting Makes All the Difference

His father spoke slowly and deliberately to make his point crystal clear. “The error of your approach lies in treating life insurance as a commodity,” he said. “It cannot be. It cannot be something you simply go out and buy when you need it. You cannot take for granted you will qualify as long as you have the money to pay for it.”

“Life insurance is a product that is underwritten according to mortality risk assessment. You have to qualify for it medically. Your lifestyle and hobbies are assessed. Your family history is assessed. Your official driving record, and legal record, and financial record, are all assessed”.

“Your entire strategy, my son, for deciding on how to choose between term insurance and permanent life insurance, is based on the assumption that you will always qualify for the lowest rate available. That is a very questionable assumption.”

The youngest son looked introspective as he digested his father’s words. “You are telling me, Father,” he said at last, “that if any one of these factors becomes a higher risk, then the financial picture changes. I may not be able to get the life insurance I need at the price I want to play, or even be eligible for it at all.”

“Yes, yes, my son,” his father replied enthusiastically, “that is exactly right. Under those circumstances, you will have lost the financial bet. Should you become a higher risk in any way, your future purchases of life insurance may be jeopardized.”

Which Approach is Best for You?

They were now heading home. The youngest son felt that the discussion was coming to its final point. He knew that his father wanted him to restart his thinking. He wanted very much to please his father, but he recognized that they were different people.  His father had taught him that all economic decisions are made with regards to a measure of risk against reward. Some people, like his father, took a much more conservative approach. Others, like himself, were more aggessive.

The conservative approach here, with regards to how to choose between term insurance and permanent life insurance, would be to make sure life insurance would always be available. That meant buying permanent insurance now. The aggressive approach would be to buy term and invest the rest. The risk would be that he would not qualify for any more life insurance, should he need it. He would then have to settle for more expensive non-insurance options.

The youngest son felt a strong sense of gratitude and appreciation for his father’s teachings. He loved his father dearly. He became motivated to show his own children the caring and dedication that his father had shown him. Smiling, he took his father’s arm and drew him close. “You are my father and my teacher. I cannot tell you how fortunate I am to be in your care.”