Term vs. permanent life insurance

There is an argument our industry has been having with itself for as long as I have been in it, and it never quite resolves. It flares up, both sides make fair points, and then it dies down without anyone moving.

The argument is term versus permanent life insurance. The reason it never resolves is not that one side is right and the other is stubborn. It is that we keep arguing about the answer before we have agreed on the question. I was reminded of this recently by Jason Watt, co-host of the Financial BS Podcast.

Watt is a respected educator in this business — I have known him for years, we know many of the same people and he does the kind of work I wish more of us did.

On this Friday’s edition of the podcast, Watt spent real time engaging with things I have written. And then he did something most of us never do: he sent me the episodes before they aired and invited a response. That is the behaviour I want to write about today, because it is rarer than it should be and because the disagreement he raised is exactly the one worth having in public.

Watt made two points. The first I agree with completely. The second I want to take apart — not because he is wrong, but because the place where he and I diverge is the exact spot where the industry has a design problem none of us has fixed.

The point I agree with

Watt has said, more than once, that 99%-plus of insurance needs are satisfied by term insurance. He is right. I have said the same thing in writing, and I will say it again here so there is no ambiguity: for the overwhelming majority of Canadians, for the overwhelming majority of their lives, term insurance is the correct answer.

It protects income during the years other people depend on it, it does so cheaply and it gets out of the way when the dependency ends. If our industry simply got good at needs analysis and put the right amount of term in force, we would close most of the protection gap in this country. On that, Watt and I are not one inch apart.

His prescription follows from this. If you want more Canadians properly insured, he argues, teach advisors to do better needs analysis and stop biasing the conversation toward permanent insurance. That is sound. The protection gap is a needs problem, and term is the needs solution.

Read that sentence again, though, and notice the word doing all the work.

Needs. Ninety-nine per cent of needs are satisfied by term. I have no quarrel with it. But a need is not the only reason a person allocates money, and it never has been.

We do not tell someone that a balanced fund satisfies 99% of their investment needs and therefore they should not hold anything else. We do not tell them their housing need is met by a rental, and therefore the desire to own is irrational.

People allocate capital toward their wants all the time, deliberately, and we do not treat that as a failure of analysis. We treat it as a person exercising judgment about their own money.

Some people make a deliberate decision to move a defined sum to the people they love when they die, with certainty, regardless of how long they live or what markets do in between. They do this because they want to, not because they need to.

Nobody needs to leave a legacy. But a great many people want to, and for them it is a real financial objective — as real as funding their own retirement.

Permanent insurance is one of the few instruments built to serve that desire cleanly. Not because it beats the alternatives on rate of return. It usually does not, and I say so plainly in everything I publish. It does something the alternatives cannot do as reliably: it guarantees the transfer.

So, when the debate collapses into term versus permanent, both sides are answering a question the client was never asked. Watt answers the needs question and reaches term. A commission-driven salesperson answers an imagined wants question — without confirming the want exists — and reaches permanent. Both have skipped the step that should come first.

The design failure

Here is the part I want to put squarely on the industry rather than on any advisor in it. We have no agreed practice for separating a client’s needs from their wants before we recommend a product.

We have needs-analysis tools — Watt is right that we should be better at them — but we have nothing on the other side of the ledger. There is no standard step in the sales process that says, in effect: we have established what you need; now let us establish, separately and explicitly, what you want so that you and I both know which question a given recommendation is answering.

Because that step does not exist, the failure runs in both directions. It is worth naming both.

A want gets sold as if it were a need — permanent insurance recommended to someone who never expressed a wealth-transfer objective, dressed up as protection. That is the failure Watt is rightly worried about, and the commission structure can make it worse, as he has documented.

But the opposite failure is just as real and far less discussed: a legitimate want gets struck off the list as if it could not exist — permanent insurance ruled out on pure-return math for a client who, had anyone asked, would have told you that leaving something behind with certainty matters to them more than squeezing out the last basis point.

The first failure oversells. The second overrules. Both happen because we decided for the client instead of asking.

Neither of those is a character flaw in the advisor. They are what you get when the process has a missing step. Fix the step and most of the term-versus-permanent heat goes out of the room, because the two products stop competing for the same slot.

Term answers the need. Permanent answers a want, if the want is there. They were never really rivals. We made them rivals by refusing to ask which question we were solving.

Watt also said, fairly, that my math does not always hold up to scrutiny. I want to answer that the right way, because how I answer it is the whole point.

I am not going to tell you my math is beyond question. I am going to tell you it is published. The assumptions are stated. The rates are disclosed. The comparison set is named.

Anyone — Watt included — can take it apart. When someone shows me an error or a better assumption, the work gets better and I say so. That is not a defensive posture. It is the posture. The value of putting the math in writing is precisely that it can be checked.

An analysis you cannot scrutinize is not an argument; it is an assertion. So, the right response to “your math doesn’t hold up” is not a louder claim that it does. It is: here it is — show me where. That invitation is open, and it is the same invitation Watt extended to me when he sent me his podcast. I am only trying to return it.

Three standards that would settle it

If we want this argument to stop going in circles, I think it comes down to three practice standards. None of them is about term or permanent. All of them are about doing the work in a form the client can see.

1. Compared to what? Document why this product was chosen over the alternatives — and, before that, document which objective it is meant to serve. A recommendation that does not name the objective cannot be evaluated, by the client or by anyone reviewing it later.
2. What does the contract actually say? Show the client where to find what is guaranteed versus what is merely projected. Most of the trouble in permanent insurance lives in that gap, and most clients have never been shown where the line is.
3. Is this in writing? Not the compliance forms. The recommendation, the math and the rationale — in a form the client can read, question, keep and share with anyone they choose. If it can be scrutinized, it can be trusted. That is the entire idea.

Watt and I disagree about how much attention permanent insurance deserves. We do not disagree about needs, and we do not disagree about the value of open, checkable work — he proved that by inviting this exchange.

If the rest of the industry argued the way he just did, in writing, in public, with the door open to rebuttal, we would not need to settle the term-versus-permanent question. It would settle itself, one documented recommendation at a time.