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Who lost the war between term and permanent life insurance?

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The ’80s were filled with great agent confrontations, which in many cases led to a flat-out street fights between agents with different insurance philosophies.

In one corner, you had the “buy term, invest the difference” gang, who were famous for saying they could sell you 10 times the amount of death benefit for the same amount of premium as a typical cash value insurance policy.

They would sell the concept of “the law of decreasing responsibilities and the law of increasing wealth.” They believed you should separate your life insurance policy and your savings instead of combining them.

They usually used an American Funds mutual fund, projecting a lifetime return of roughly 12 percent. They did this while bashing the cash value policy you might have bought from a close friend or relative (which often led to sour relationships after the new agent got a hold of your policy).

These agents sold fear and betrayal like no one else in North America. If you had a cash value policy before they showed up, you walked away afterward wanting to call the agent who sold you the policy every four-letter word you could think of.

These agents were proud to call themselves “termites,” since all they believed in was selling term insurance. Anyone who sold anything else but term life was referred to as a “trash value agent.”  The termites got their playbook from the famous union leader Jimmy Hoffa, who ran his organization with a bunch of ragtag people who made others think their only priority was to correct an injustice.

In the other corner, you had cash value agents, who believed in selling you a permanent policy that would last you a lifetime. These agents felt that term insurance was a pure profit play for the life insurance company because they rarely paid out.

Cash value agents sold you on the concept of building cash value on a permanent policy, in which you would see returns around 3 to 7 percent. On the cash value side, the agents looked more like actual life insurance agents: They wore a nice suit and tie and looked like they were running for Congress. 

The career life agents selling permanent insurance were upset because they saw “termites” as unqualified agents making the industry look bad. These agents felt a permanent policy was a better choice than term because permanent would protect the family for the rest of their lives. Not to mention their policies wouldn’t make you feel like you were throwing your money away on a policy that would eventually lapse. 

Both sides had their own convincing arguments about why they were in the right and the other side was in the wrong. They each carried policies from competitors to show clients what bad policies they were selling.

It was very polarized and similar to today’s political scene: Each side really couldn’t stand the other. You could see the look on an agent’s face change when his client mentioned having a policy from a competitor’s firm.

Competition-fueled innovation

The truth is that both the term and cash value agents of the past several decades were selling mediocre products compared to what we have today. The great thing about free market capitalism is that, through competition, companies will constantly work on designing products that will out-perform the competition; and that’s exactly what ended up happening to the life insurance industry.

On the term insurance side, products went from inadequate terms of 10 to 20 years, to now terms of 30 and even 35 years. The product eventually overcame the famous objection that families bring up: “What happens to all the premiums I pay to the life insurance company if I end up not dying?”

Originally, the termite agent would answer by explaining the law of decreasing responsibility (i.e., that there was no longer a need for life insurance when the policy lapses because the kids would be grown and the house would be paid off). That sounds good in a perfect world, but unfortunately we’re not living in a utopian society.

In many cases, life-changing events alter our financial plans, such as weddings, elderly parents in need of long-term care or assistance, college costs, a brother or sister in need of a financial bailout, etc.

So what do you do when you’re 62-years-old living in a house with a $200,000 loan, but you no longer have a life insurance policy? (Set aside the fact that estate planning laws, having changed over the years, favor having more life insurance in later years.)

Eventually, the termites came out with the “return of premium” (ROP) life insurance policy, which for some is the best of both worlds. You pay the premium to the life insurance company, and if you stay with them for the duration of the plan, all of the premiums will be returned to you.

So, for example, if you were to pay $50 a month for a $250,000 policy for 30 years, at the expiration of the policy you could receive back $18,000. Though this might not solve all of your problems, the knowledge that money is not going to waste might at least make you more comfortable purchasing the policy. Nowadays, you’ll even see ROP policies being sold for 35 years through certain insurance companies. 

On the cash value side, the rise of termites influenced the actuaries to create better, more creative products for the client. They went from selling basic whole life policies to universal life to variable life to guaranteed universal life and now fixed index universal life, the last of which has become a big hit with middle income families.

Though the development of these products represents much progress, the rift still exists between the two philosophies of term and permanent. What the termites did in the ’70s and ’80s is exactly what Chan Kim talks about in the book “Blue Ocean Strategy:” Instead of competing against hundreds of competitors for the same product, create your own “blue ocean” where no other sharks compete for business.

In so doing, you should have a good run until others show up. Many who did exactly in the ’70s and ’80s became wealthy.

The point of this article isn’t to take sides, but to pose the question “Who really lost the war between term and permanent?” Notice I didn’t say who won the war, but who lost. The reason: It doesn’t really matter who’s right or wrong among the agents when you see how everyday Americans fared.

The reality is in the 1960s, 72 percent of American families had a life insurance policy; today that number is at a staggering low of 44 percent, according to LIMRA. The number of agents (according to a March 2010 Wall Street Journal article) has declined from nearly 500,000 agents in the ’70s to somewhere around 150,000 licensed agents today.

This is despite the fact that the population has increased to 316 million today from 203 million in 1970. So though the demand for life insurance is higher than ever, the supply of agents is at a 60-year low.

To top it off, the cost of insurance is lower than it has ever been due to an increase in our life expectancy. So to answer the question, “who lost the war?” you have to look at who had the most casualties. The answer is neither the term or cash value agents, but instead the Millennials and Gen Xers who will see the aftermath of this war.

Growing demand, fewer agents

There are nearly 140 million individuals between the two combined generations: future leaders who are in their 20s and early 30s, getting ready to experience life events such as getting married, buying their first home and starting a family.

And all this is happening while the supply of life insurance agents is at an all-time low. As most of us know, life insurance is something that’s sold, and rarely bought.  The last thing people think about is buying life insurance. And they will gladly put it aside for as long as they can.

Good insurance salespeople are desperately needed, and our industry needs to train more foot soldiers willing to go out to protect millions of families. Whether you lean towards term or perm or a combination of both, we have our work cut out for us.

Not enough people understand and believe in the importance of our product. There’s enough business for anyone who makes the effort to be part of this honorable profession.


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