Term Life vs Perm Life

Term Not Perm: Why Ladder Loves Term Life Insurance

People want to get life insurance because they want to do the right thing. They want to be smart about taking care of their people and their finances. In fact, most people acknowledge that life insurance is a smart financial hedge to protect families against loss of income  – 84% of Americans say most people need life insurance.

But, life insurance still lingers on to-do lists. Why?

Basically, people want life insurance that is easy to understand, quick to do, and that doesn’t cost too much, but the process has historically been lengthy and complex.

At Ladder, when we set out to design how smart, dynamic life insurance should work, we looked at two key life insurance product categories – term life insurance and permanent (“perm”) life insurance.  

Term vs Perm

Term vs Perm CompLevel term life insurance offers customers a straightforward, focused proposition – they pay a regular amount for coverage over a set period of time (the “term”), and if they die during that term, the insurer pays the coverage amount for all valid claims. That’s it, by design.

Permanent life insurance offers coverage for the lifetime of the customer (hence the name “permanent” or “perm”). It also usually has an investment component built in that offers a “cash value”. The most well known examples of permanent life insurance are whole life and universal life. For simplicity, we focus on whole life here.

Different people may need  different types of life insurance, and much has been written on this topic.  For instance, permanent life insurance may work best for someone who wants lifelong coverage.

But at Ladder, we believe term life insurance makes the most sense for our customers. Here’s why…

Top 10 Reasons Why Ladder Offers Only Term Life Insurance

  1. Term life insurance can be 3-10x cheaper

Term life insurance can cost 3-10x less than whole life for the same amount of coverage. This is because whole life insurance includes a cash value component, where part of the whole life insurance payment each month is for life insurance coverage, and part of it accumulates as an investment. While whole life offers a cash value, this can be an expensive way to save money, because of commissions paid on the premium and other built-in costs.  

  1. Term life insurance is transparent

Level term life insurance purchased through Ladder offers coverage over a defined term (period of time), which customers pay for in pre-defined regular payments. Permanent life insurance also offers coverage paid for with pre-defined regular payments, but those payments are made for a customer’s whole life, which might be a much longer time period than is needed.  In addition, a whole life insurance payment has to be allocated across both the life insurance premium and the cash value, and it can be difficult to track how much goes where.

The beauty of term life insurance is that it gives you one product that does one thing really well.  It has a clear and transparent value proposition – you pay for life insurance and that is it.

term insurance transparency

  1. Term life insurance puts the customer in control

Because term life focuses exclusively on life insurance, customers control how much of their other income they would like to save, and when they would like to save it. This gives customers the ability to  change their investment strategies when they want, so they can use the money saved from choosing term life insurance for other purposes, as they see fit.

In contrast, customers choosing whole life insurance sign a contract determining what the cash value will be for the life of the contract, and it can be difficult to determine what interest rate is being applied to the cash value, and how their money is allocated.  For example, when a policy is first purchased, the premium amount is fixed.  But the portion of that premium that goes to pay for the cost of the insurance gets bigger as the customer ages.  So the longer a policy is held, the smaller the portion of the premium that goes towards the cash valueThus, as a customer ages, it becomes harder to determine much of the premium goes to life insurance, how much goes to cash value, and how much goes to the insurance company to cover its overhead and other costs.

Consequently, people who want more control over their life insurance and investments might prefer a  “buy-term-and-invest-the-difference” strategy vs a whole life insurance product (see #10 below).  

  1. Term life insurance is simpler

Term life insurance is designed to be simple – if the customer dies during the term, it pays out if the claim is valid. In that way, term life insurance works like car insurance – the customer pays only for coverage. This simpler design helps customers be confident that it will work for their families as they might expect. Permanent life insurance products include features such as cash values, optional policy loans and riders, which can make customer expectations and value for the money harder to decipher.

  1. Many people only need life insurance for a term

Many people may need less life insurance over time because their children will become financially independent, mortgages will get paid off, and they will retire on their savings, etc.  Permanent life insurance  provides coverage for the whole life of a customer and is priced accordingly. So if someone wants coverage only for a specified period of time, term life may make more financial sense.

  1. Term life insurance prices are guaranteed

At Ladder, we call this a “price-lock guarantee”. This means that customers can lock in a lower price for their entire term when in good health and while younger. This way, they can pay less over time than if they started coverage later on.

Now vs future prices

  1. Term life insurance has no surrender charges, withdrawal penalties, or change fees

Term life insurance with Ladder lasts until the end of the term, but we also enable laddering up or down – giving customers the ability to easily apply for more coverage or to lower their coverage (and also their payment) as their needs change. We also have no extra fees, paper forms, or calls from commissioned agents to get it done.

With permanent life insurance, changes to the policy may incur surrender charges/withdrawal penalties, change fees or administration fees, so care should be taken when making any changes to permanent life insurance policies in future.

  1. Term life insurance pays lower commissions

In general, much higher commissions are paid to agents for permanent life insurance than for term life insurance.  At Ladder, we  believe higher commissions can have negative consequences, potentially creating a misalignment of incentives between commissioned agents and customers who are trying to find the best deal for life insurance coverage for their family. When that happens, customers can end up paying more than they wanted or needed to, or buy the wrong products entirely. This could be a  factor behind why there’s currently a $16 trillion (!) coverage gap in the United States – a lot of people aren’t being served well.  And it’s why Ladder does not have commissioned agents.  

  1. Tax advantages of term life insurance benefits everyone

Term life insurance payouts generally are not subject to federal income tax. While any death claims for permanent products are also not subject to federal income tax, any tax advantages of the savings component of permanent life insurance can be complex – care should be taken when evaluating whether permanent life insurance works best for the customer versus other options

  1. Buy-term-and-invest-the-difference can beat permanent life insurance

“Buy-term-and-invest-the-difference” is a financial strategy where a customer buys term life insurance, then saves or invests the difference between the payment for that term life product and what it would have cost for a permanent life insurance product that provides the same coverage amount. Compared to a permanent life insurance product like whole life, buy-term-and-invest-the-difference strategies can have significantly higher expected returns.

Why any of this matters

So, what? Why is life insurance important, and why are we so passionate about helping people solve their life insurance problem in the best way possible?

Because those people matter. When someone unexpectedly dies, it upends the lives of everyone around them. We know this well because of our founding story.

We’ve redesigned life insurance with our customers at the center of everything, which is why we believe term life insurance is a smart choice.  If you have any questions for us, we are always happy to help.  

Stay tuned and see what’s next by following Ladder on Facebook, Twitter, and Medium.

This material is designed to provide general information on the subjects covered. It is not, however, intended to provide specific advice or to serve as the basis for any purchasing decisions.