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

A Family Discussion (click here for Part 2, and here for Part 3, of our  family trilogy.)

dreamstime_xs_33371124“My son, do you know how to choose between term insurance and permanent life insurance?”

The young man repeated the question directed to him by his father. He considered it carefully before answering. “I know it is an important question, Father,” he replied. “Unfortunately, I do not feel equipped to provide an answer. Will you help me?”

“Yes, my son,” his father answered. “It is an essential part of your financial education. You are the eldest of my children, and the time has come for you to learn how to make this decision. Come, prepare tea for us.”

The eldest son assembled the tea service. His father joined him at the table overlooking the yard. The day was bright and sunny.

The son waited for the father to resume the conversation. The pleasant noise of the children playing next door filtered into the room. “Tell me the number one question which must be asked,” his father finally said.

A Guaranteed Return

The eldest son considered his response. After a brief deliberation, he replied, “Since this is a financial decision, return on investment must be a prime consideration.” He waited for confirmation from his father that he was on the right track.

His father smiled approvingly. “Yes”, he said. “Return on investment is our priority. How does that affect your decision?”

dreamstime_xs_20863784“To tell you the truth, Father, that makes our decision much easier. Life insurance is the only form of insurance in which a claim is guaranteed to be paid. Each one of us must die; there is no avoiding that eventuality.” The son looked sad as he contemplated his own mortality, but forged ahead in a determined effort to complete his train of thought.

“No other insurance has this certainty,” he continued. “We have medical insurance, but may never get sick or hurt. We have disability insurance, but may never miss work. We have auto insurance, but may never have an accident. And so on with our home insurance, our professional liability insurance, and every other form of protection.  We may keep all these other policies for a lifetime and yet never file a claim. All the premiums will have been paid for benefits just in case they were needed. But with no claim, that benefit would never be collected.  Life insurance is a sure thing!” he concluded with emphasis. “If one holds on to the policy his entire life, the benefit will be paid. There is a guaranteed return on investment.”

“If, however, one selects term insurance, odds are he will drop the policy when it gets too costly. He will then deprive himself of the opportunity to realize a significant return.”

dreamstime_xs_34813421His father nodded in agreement. “Well done,” he said. “That is very important to know.” He sipped this tea and looked out the window. As the eldest son sipped from his own cup, he noticed birds he had never seen in their yard. They were blue with yellow tints. Their song was bright and beautiful.

Insuring Insurability

“We are off to a good start,” his father began again. “Now tell me: what is your next consideration on how to choose between term insurance and permanent life insurance?”

The eldest son felt encouraged by his father’s confirmation. He thought about his answer. After a few moments he stated, somewhat tentatively, “Father, I would say that the consideration of next most importance would be insurability.”

His father furrowed his brow in response. “Insurability!” he exclaimed. “Why is that the next factor in this decision?” Somewhat surprised by his father’s incredulity, the eldest son nonetheless persisted in his argument.

“Here is how I see it, Father. One can never take his insurability for granted. He may be young and healthy today, but in 10 or 20 years things may unfortunately be different. Many medical conditions strike one in the middle and later years.”

dreamstime_xs_10133911“Not only that, but one may adopt a lifestyle that could jeopardize his insurability. People take on adventurous hobbies such as rock climbing. Some may start a business or take a job that requires travel to undeveloped places overseas.”

His father seemed intrigued by his answer. “Those are very valid points,” he stated. “But tell me: what bearing does insurability have on how to choose between term insurance and permanent life insurance?”

Life is Cycles

The eldest son was up for the challenge. “Well, Father, think about this. People tend to think that life is a straight line. One moves from one stage to the other in a linear fashion. One stage is completed and then the next stage begins. There is no overlap.”

“But I do not think life is like that,” he declared with a serious tone. “I tend to see cycles in life, not straight lines”. Noting the appreciative look on his father’s face, the eldest son continued. “For example, when we are young adults, we get married and raise children. At some point our children grow and leave to form their own families. We then think we are done with dependents.”

“But look around us. More and more people, in their middle age are caring for their elderly parents. Their mother and father come to depend on them for some care and financial support.” He smiled at his father and grasped his hand affectionately. “You know I wish you the strength for a long and happy life.” he said sincerely. His father smiled fondly.

The eldest son moved past the moment and made his point.“But the fact remains that one may take on unforeseen obligations later in life. It could be financial support for a relative. It could be a loan to cover expenses. These responsibilities often need to be covered by life insurance. If one had purchased term insurance, but had terminated the policy, he will have to start over again in the marketplace. If any one of the aforementioned risk factors has developed, medical or otherwise, he may not be insurable. Or, if he is insurable, the price will be very high because he is now much older.”

dreamstime_xs_11105915His father appeared to digest the thought. “So you are saying” he offered, “that permanent insurance should be selected in case we have a need for a policy later on in life – a need we had not anticipated.”

The eldest son agreed. “Yes, Father, that is exactly what I am saying . Once one buys permanent insurance, he really does not have to worry about purchasing coverage again. He is never in a position in which his assets and his liabilities are without protection.”

“Most importantly, Father, he knows that the people he loves will be taken care of. They will never lack for money, even if he is tragically lost to them. That to me is peace of mind, and that is something I cherish.”

His father brought the tea cup to his lips and sipped slowly as he looked out the window. It seemed as if he was noticing things he had never seen before, even though the view had been the same for years.

After a while he looked at his eldest son with a smile. He spoke with gratitude and pride.

“As parents, we look for signs of how our children are developing. Asking you the question of how to choose between term insurance and permanent life insurance has been my way of probing beneath the surface of your mind. It is not just an effort to examine your financial thinking. It is really a way of learning your values.”

He rose and bowed to his eldest son. “Come! Let us walk together and enjoy the day.”

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