Most people who have financial dependents have a genuine need for life insurance. But for the majority of those people, a simple term life insurance policy can fulfill that need in a relatively uncomplicated, inexpensive manner. A term policy purchased in early to mid adulthood that lasts for 20 or 30 years (with a fixed premium during that time frame) will protect most families throughout the time when they are financially responsible for children and debts like mortgages. After the children are grown, and the mortgage is paid off, and especially after retirement, there is much less of a need for significant life insurance death benefits for most people.
For some people with more complex financial situations (such as a family business that they would like to leave to their heirs, for example), permanent life insurance may be a more appropriate choice. But such policies are much more expensive than term life insurance, and tend to be more complicated too. For people who really only have a genuine need for the protection offered by term life insurance, the investment benefits associated with permanent life insurance can usually be obtained in a more straightforward manner by simply investing the additional premiums that would have been needed to purchase permanent life insurance.
Although permanent life insurance products can be a useful tool for some clients, purchasing them might not be truly the best financial move for many people who might be better served by a basic term life insurance policy and a separate investment program to accumulate money for later in life and/or to pass on to heirs. However, the commissions for agents who sell permanent life insurance is significantly higher than the commissions for term life insurance policies, in part because the policies themselves are so much more expensive. This can potentially create a conflict of interest if a client is taking policy recommendations from an agent who will receive the commission for whatever policy is ultimately purchased.
In a reminder that Universal Life insurance (a form of permanent life insurance) premiums are not fixed, a recent class action lawsuit in CA ended with a federal judge ruling that Conseco Life Insurance Co. cannot triple premiums for 50,000 policy holders who have had their policies since the late 80s and early 90s. The courts got involved because the proposed premium increases were so significant, but the complexities of universal life insurance include a lot of flexibility in terms of premiums. If interest rates drop (as was the case for people who bought policies in the 80s, when interest rates were much higher than they are today), future premiums can increase significantly. Although the court has ruled that Conseco cannot triple the premiums for those policy holders, there’s no set limit for how much premiums can increase. Older policy holders who have had their coverage for decades can find themselves unable to keep their policy in force if premiums rise beyond what they can afford.
Anyone in the market for a life insurance policy should be well aware of the differences between term life insurance and permanent life insurance, and should understand the long term implications of each type of coverage before selecting the best option for their particular situation.