Term or permanent life insurance? A new study offers guidance

(Press-News.org) COLUMBUS, Ohio – A new study offers clarity on one of the most common questions asked of financial professionals: Is term or permanent life insurance right for me?

 

Researchers at The Ohio State University conducted a study of how different life insurance product types were related to whether households had adequate financial resources if an income earner died.

 

They didn’t compare permanent and term life insurance directly, but they calculated how likely households with different life insurance products were financially prepared compared to those with no insurance.

 

The result? Households with both term and permanent life insurance policies were most likely to be ready for income loss after an unexpected death, when compared to those with no insurance.

 

“There’s a lot of debate in the financial adviser community on whether permanent life insurance or term life insurance is the best tool to protect consumers,” said study co-author Eric Olsen, who did the work while earning his PhD in family resource management at Ohio State.

 

“Our study suggests having both of them might be ideal for many people.”

 

Co-author Cäzilia Loibl, professor and chair of consumer sciences at Ohio State, said the results show the value of each type of life insurance product.

 

“The discussion is often one versus the other, but they have some different purposes and can work well together,” Loibl said.

 

The most concerning finding was that 56% of the sample did not have adequate financial resources – from insurance or other sources – to deal with the loss of an income earner, Olsen said.

 

“We need to examine how we can motivate families to build the resources they need to protect themselves in case of the death of an income earner,” he said. “Way too many people aren’t prepared.”

 

The study was published online recently in the journal Financial Planning Review. The research was led by Youngwon Nam, who did the work while earning her PhD at Ohio State, and who is now an associate professor of consumer science at Seoul National University in Korea. Robert Scharff, professor of consumer sciences at Ohio State, was also a co-author.

 

Consumers are often confused about differences between term and permanent life insurance, the researchers said. Term life insurance is often cheaper and covers people for a set period of time. Permanent life insurance (also known as cash value life insurance), which includes whole life, universal life and variable life, among others, is more expensive, but lasts for a whole lifetime and includes an investment component.

 

The researchers used data from the 2022 Survey of Consumer Finances, conducted by the Federal Reserve Board. This study only included households with more than one person, with at least one being employed full-time. The final sample was 1,818 households.

 

In this sample, 54% had term life insurance, 8% had permanent life insurance, and 10% had both.

 

The study was designed to examine financial adequacy: the ability of households to replace the income lost if an income earner died.  Researchers measured financial adequacy three different ways.

 

Households had life insurance adequacy if their life insurance payout alone could replace lost income; net financial assets adequacy meant assets like savings, stocks, and retirement accounts (minus liabilities) plus life insurance payout could replace income; and net worth adequacy included financial assets and non-financial assets, such as houses and property, (minus liabilities) plus life insurance payout.

 

The findings showed 11% of the sample had financial adequacy with life insurance alone, 17% had net financial asset adequacy and 16% had net worth adequacy.

 

So how did the different types of life insurance products compare in helping achieve financial adequacy?

 

In one analysis, the researchers examined the financial adequacy of households under the net financial asset adequacy scenario.

 

In this case, households that had both term and permanent life insurance had a 5.58 times higher likelihood of being financially prepared for the death of an income earner than a household with no life insurance.

 

A household with only term life insurance had a 3.95 times higher likelihood of financial adequacy, and a household with only permanent life insurance had a 3.01 times higher likelihood of financial adequacy.

 

The results were similar when the researchers looked at how prepared households were under the life insurance adequacy and net worth adequacy scenarios.

 

Overall, the findings make clear that people need to check to make sure that they have enough life insurance coverage, because most don’t, Loibl said.

 

And while any kind of insurance is better than none, this study suggests having both term and permanent life insurance may be a strong option for many.

 

“What kind of life insurance you have does matter in the long term and people need to determine what is best for their situation,” she said.

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