A study by researchers at The Ohio State University suggests that a combination of term and permanent life insurance could offer households the best financial protection in the event of a primary income earner’s death. The findings underscore the importance of adequate life insurance coverage, as over half of the surveyed households were found to be unprepared for an unexpected loss of income.
A new study from The Ohio State University provides much-needed clarity on a frequently asked question in the realm of personal finance: Is term or permanent life insurance the better option?
While the researchers did not directly compare the two types of insurance, their analysis revealed that households holding both types were the most financially prepared to handle the loss of an income earner when compared to those without any 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,” co-author Eric Olsen, a doctoral candidate in family resource management at Ohio State at the time of the research, said in a news release. “Our study suggests having both of them might be ideal for many people.”
The study, published in the Financial Planning Revie*, highlights the value of having a mixed insurance portfolio.
According to co-author Cäzilia Loibl, a professor of consumer sciences at Ohio State, each type of life insurance serves unique purposes and can complement one another effectively.
“The discussion is often one versus the other, but they have some different purposes and can work well together,” Loibl said in the news release.
One alarming discovery was that 56% of the surveyed households lacked adequate financial resources — from insurance or other assets — to manage the financial blow of losing 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 added. “Way too many people aren’t prepared.”
The research, spearheaded by Youngwon Nam, a former doctoral student at Ohio State and now an associate professor at Seoul National University, used data from the 2022 Survey of Consumer Finances conducted by the Federal Reserve Board. The sample included 1,818 multi-person households with at least one full-time employed member. Of these, 54% had term life insurance, 8% had permanent life insurance and 10% had both.
Term life insurance, typically more affordable, covers individuals for a predetermined period, while permanent life insurance — encompassing whole life, universal life and variable life — offers lifelong coverage and includes an investment component.
To gauge financial preparedness, the researchers evaluated three types of financial adequacy:
- Life Insurance Adequacy: Could life insurance payouts alone replace lost income?
- Net Financial Assets Adequacy: Could a combination of savings, stocks, retirement accounts and life insurance payouts replace income?
- Net Worth Adequacy: Could the sum of financial and non-financial assets, minus liabilities, along with life insurance payouts replace income?
The study found that in households possessing both term and permanent life insurance, the likelihood of financial adequacy was 5.58 times higher compared to those without any life insurance. Households with only term life insurance had a 3.95 times higher likelihood of financial readiness, and those with only permanent life insurance had a 3.01 times higher chance.
The patterns remained consistent across the different measures of financial adequacy examined by the researchers.
Loibl stressed that ensuring ample life insurance coverage is crucial since a large majority of people are under-insured.
“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 added.
These insights prove invaluable for individuals seeking to make informed decisions about life insurance, advocating for a combined strategy to optimize financial security for their households.
Source: The Ohio State University