Jewel Ebanks

Jewel Ebanks, Financial Advisor with Sagicor Life of the Cayman Islands and President of the Cayman Islands Association of Insurance and Financial Advisors (formerly the Life Underwriters Association of Cayman,) explains the differences between term life insurance and permanent life insurance.

There are two basic kinds of life insurance - “permanent” and “term.”

Permanent life insurance can be described as owning your life insurance coverage. With permanent life insurance policies, payments (premiums) usually build equity over time. This is called “cash surrender value.”

Conversely, with a “term” (i.e. temporary) policy, one “rents” coverage for a stated period of time and premium payments seldom build equity.

There is a common myth that term life insurance is always cheaper than permanent life insurance. Term life insurance premiums start low, but often increase significantly over time whereas permanent life insurance plans may actually cost less over the long term.

Term premiums usually start and remain low for a period of one to 10 years and then rise, sometimes dramatically, when the “lease” renews at the end of the stated period (term.) Permanent life premiums are higher, but they remain level for a lifetime.

Low initial term premiums are attractive to cash-strapped buyers and seem more affordable for a given death benefit as compared to “whole” or “universal” life policies, which are the two common forms of permanent coverage.

Over the long run, however, term life insurance may prove to be so unaffordable compared to the permanent variety that owners cancel the vast majority of term policies before they are paid out.
Term life insurance, which offers death-protection-only coverage, is often heralded as the least expensive way to insure one’s life. In the early years of a term life plan, that is usually true. However, if the policy is kept in force long enough, term coverage may ultimately cost more than a permanent life insurance program. As with most financial calculations, the devil is in the details.

To illustrate the difference between term and permanent life insurance premium costs over the long-term, here is an example: Consider a male, age 25, who is in excellent health and is shopping for $250,000 in life coverage. A typical 30-year term policy, which offers level premiums for 30 years, would cost this individual about $370 annually until the he attains the age of 55.

At this point, the premium would increase significantly to over $4700 per year. When this individual reaches the age of 65, he would have spent $58,780 on this policy. This can be seen as money that is gone forever, as it has been spent on a policy with no cash surrender value. Since there is no equity, the insurance contract pays off only when the individual dies.

This can be compared to a popular form of permanent life insurance called “universal life,” which features higher but level annual premiums of $1,739 every year to the age of 100 or beyond. By his 65th birthday, the same man’s total premium outlay of $69,560 ($1,739 x 40) will have built equity (cash surrender value) of $157,000. That amounts to $87,000 more than his premium investment.

That’s real money the man can cash in, perhaps to supplement his retirement, borrow against, or leave to grow further. Permanent insurance has a living benefit as it can pay off before one dies.

While shopping for life insurance, it is a good idea to have the agent provide and explain term and permanent illustrations. Written life illustrations enable comparisons of long-term costs and benefits. These are printed reports that lay out the premiums a proposed insured person can expect to pay over time for a given death benefit.

A term illustration will reveal how premiums drastically increase when the stated term expires. A permanent life insurance illustration will include guaranteed and non-guaranteed (historical) cash value projections, typically to age 100 or beyond.

Permanent illustrations enable you to calculate the net cost of insurance which is defined as cash value accumulations minus cumulative premium outlay at any given future age or policy year. If the net cost is a positive number, then the life insurance contract will have paid for itself handsomely.

It is possible to convert a term life policy to a permanent plan, which may be something to consider once you evaluate the ongoing cost of an existing term policy.

Term insurance policy conversion is a feature that enables a policyholder to initially obtain life insurance coverage inexpensively and then later exchange a portion or the entire term plan for a level premium, cash value-building permanent plan. Conversion to a permanent plan can often be accomplished without evidence of insurability such as a physical exam.

When buying term life insurance, it is a good idea to ask the agent or company if, when and for how long term conversion is available.

Overall it is important to remember that with life insurance, one usually gets what one pays for. Make sure to talk to an agent, and to compare, study and understand short and long-term costs and benefits.

Jewel Ebanks joined Sagicor Life of the Cayman Islands as a Life Underwriter in July 2004 after 23 years in Banking. She was Agent of the Year for 2007 and is a member of the prestigious Million Dollar Round Table and Century Club.