Term vs. Permanent: Is Term Really Less Expensive?

John Vogel¹, a 52-year-old successful businessman, is in need of $30 million of death benefit protection for estate planning purposes. John’s business is in growth mode, making him hesitant to commit to a large annual premium for $30 million of permanent coverage. To address John’s cash flow concerns and still obtain the necessary coverage, John and his advisor explored various ways of combining permanent insurance and less expensive term insurance. However, John’s primary need is for permanent coverage, so it is assumed that the term coverage will be converted at the end of the conversion period. In this case, the term conversation period is ten years.

Summary

While initially attracted to the low early premium of an all-term solution, John quickly realized that delaying the permanent coverage to an older age results in a much higher premium later on. In fact, if John lives longer than expected the cost of maintaining coverage to age 100 will increase by 35% over the cost of purchasing all-permanent coverage today.

VARYING COMBINATIONS²	ANNUAL COST IN YEARS 1-9	ANNUAL COST IN YEARS 10+³	CUMULATIVE COST THROUGH AGE 100	% INCREASE
$30M Permanent and $0 Term	$338,467	$338,467	$16,246,416	_
$25M Permanent and $5M Term	$287,559	$374,645	$17,199,199	6%
$20M Permanent and $10M Term	$236,566	$410,824	$18,151,217	12%
$15M Permanent and $15M Term	$185,573	$447,002	$19,103,235	18%
$10M Permanent and $20M Term	$134,581	$483,180	$20,055,262	23%
$0M Permanent and $30M Term	$32,485	$555,537	$21,958,308	35%

Client Outcome

In the end, John purchased $15 million of permanent coverage and $15 million of term coverage. This strategy provides the desired $30 million of protection, while keeping premiums within the current cash flow. Knowing the importance of eventually having all $30 million as permanent coverage, a term solution with a strong conversion privilege was selected.

Takeaway

Term coverage can provide cost savings in the short term, but the cumulative cost of permanent insurance needs will be much greater in the future after the initial term period ends. In John’s case, the cumulative cost of coverage at age 100 increased by ~5% for every $5 million of additional term coverage purchased. For clients contemplating a combination of term and permanent coverage, it is important to weigh the needs between short term cash flow and long-term cost savings.

1. Client name has been changed to protect confidentiality.
2. Analysis based on Prudential VUL Protector and Prudential Term Essential 10 at best class non smoker rates.
3. Future premium is dependent on many factors, including the availability and pricing of the current insurance products. Premiums at conversion may be more or less than the premiums quoted today.

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The information presented here is for educational purpose only and is not intended to provide specific advice or recommendations for any individual nor does it take into account the particular investment objectives, financial situation, or needs of individual investors. Client names have been changed to protect confidentiality. The case study is for illustrative purposes only. Individual results may vary.

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