Term or Permanent Life Insurance? New Study Offers Guidance
A new study from The Ohio State University offers clarity on one of the most common questions asked of financial professionals: Is term or permanent life insurance right for you? Researchers analyzed how different life insurance products relate to households’ financial preparedness in the event of an income earner’s death.
The study found that households with both term and permanent life insurance policies were most likely to be financially prepared for the loss of an income earner, 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 Eric Olsen, co-author of the study. “Our study suggests having both of them might be ideal for many people.”
The researchers used data from the 2022 Survey of Consumer Finances, conducted by the Federal Reserve Board, which included 1,818 households. The findings showed that 56% of the sample did not have adequate financial resources to deal with the loss of an income earner. “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,” Olsen said.
Term life insurance is often cheaper and covers people for a set period, while permanent life insurance (also known as cash value life insurance) is more expensive but lasts a lifetime and includes an investment component. The study measured financial adequacy in three ways: life insurance payout alone, net financial assets plus life insurance payout, and net worth plus life insurance payout.
The results showed that households with 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 those with no life insurance. “What kind of life insurance you have does matter in the long term, and people need to determine what is best for their situation,” said Cäzilia Loibl, co-author and professor of consumer sciences at Ohio State.
The study’s findings emphasize the importance of checking life insurance coverage, as most people are underprepared. While any kind of insurance is better than none, having both term and permanent life insurance may be a strong option for many individuals.
