The Forgotten Term Insurance Debate
Over in the US, punch in a query about life insurance and soon you'll find the debate "Term versus Permanent" - here in NZ that debate seemed to be settled a long time ago. Overwhelmingly in favour of term insurance. Returning to the argument, though, is helpful because it reminds us what insurance is for. The debate runs something like this:
1. You need insurance that is inforce when you die. Most people don't die when they are in their 30s or 40s, they die when they are 65 plus.
2. Buying cheap term cover means you have plenty of insurance inforce when you are less likely to use it, but probably very little later because it gets so expensive.
3. Level premiums associated with permanent cover means affordability is dealt with through a form of saving.
The argument against permanent term hass always been:
1. That if you save, you should save outside of insurance - preferably in a transparent savings or investment vehicle where fees and return are clear.
2. That your need for insurance probably tracks an inverse relationship to your premium curve (more is needed to cover debts and contingencies when you are younger, much less when you turn 65 plus).
3. That having separate savings is more flexible.
Consumers, it seems, are not good at saving up to pay insurance premiums though. The medical insurance ownership curve illustrates this well - they find other exciting distractions. The old whole of life salesman knew this, and would therefore often recommend a mix, some permanent life cover and some term insurance.
However, such solutions, however sensible, are unlikely to be seen in New Zealand for a long time. Our approach to regulating financial services is about to make it harder still to recommend permanent insurance - as this is classed as a security and is a category 1 product under the recent Financial Advisers Act. You will need to be an Authorised Financial Adviser to sell it.


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