Disclaimer: East Franklin Capital does not currently sell life insurance policies. We DO factor life insurance (and disability) policies into our long-term planning because I think it is an essential part of most (not all) long-term financial decisions and legacy planning.
Okay, this week’s installment is going to be a relatively deep dive into the topic of life insurance (and to a lesser extent, long-term disability insurance). With that said, I think it is important to also state outright that I believe insurance is best understood not as an investment, but as a risk-management mechanism. Its economic value lies in protecting against low-probability, high-severity events that would otherwise impair long-term financial stability. To clarify one point—death is not a low-probability event (in fact, it is a 100% probability event), but the timing is what we are really talking about and focusing on when thinking about the value of life insurance.
When evaluated through probabilities, cash-flow modeling, and opportunity cost, life insurance decisions become far clearer. This framework also reveals when coverage becomes excessive or unnecessary, how term and permanent life differ economically, and why long-term disability insurance often carries greater expected value for working professionals.
When Life Insurance Makes Sense (Mathematically)
Life insurance is most efficient when three conditions are present:
- Financial dependency exists
- Loss would materially impair household solvency or as least activities
- Risk exposure is time-limited
For most working professionals, the dominant asset on the balance sheet is future earned income. That is to say, the adult humans in the household are the asset that we are protecting. By way of an example, consider an individual earning $100,000 in year one, with income growing at 5% annually over the next 20 years. Total projected earnings will look like:
This $3.3 million (no inflation adjustment for this example) represents the gross economic exposure being insured against premature death during earning years. Life insurance functions as a hedge against the risk that this income stream abruptly falls to zero before financial independence is achieved.
I think it is important to also point out that, in my view, life insurance that may have clear value at one time can become excessive or even unnecessary down the road. Life insurance becomes economically inefficient when the underlying risk disappears, but the policy remains in force. Examples of typical conditions where coverage is excessive or unnecessary might be:
- Dependents are financially independent
- Mortgages and major liabilities are retired
- Portfolio income replaces earned income
- Net worth allows for self-insurance
As dependency declines and net worth rises, the expected value of additional life insurance becomes increasingly negative—particularly for healthy individuals beyond peak earning years. (1)
Term vs. Permanent Life: A Quantitative Comparison
I understand that some insurance experts might cringe at the next statement, but I am just trying to frame the discussion (not provide all the iterations or varieties available!) Life insurance comes, broadly speaking, in two primary flavors – term and permanent. Term insurance is basically a pure mortality risk transfer. The general structure of a term policy is a fixed premium, fixed death benefit, defined duration (e.g., 10 years, 20 years, etc.) and, importantly, no cash value. I consider term insurance “pure” insurance. As long as you make the premium payments, death during the term results in a payout of a death benefit.
Permanent life insurance has more moving parts. The basic structure combines a lifetime death benefit, cash value accumulation, and reserve funding to address future obligations. The premium on permanent insurance is significantly higher as the policy is designed to accumulate cash value and cover a benefit payout over an indeterminate period (i.e. the insured’s lifespan). It is the cash value accumulation and lifelong benefit that are often the compelling argument for permanent over term life insurance.
Now for some math…
The below example are JUST EXAMPLES and not guarantees or information that is specifically confirmable. Rather, the below illustrations are intended to be examples that I think are an important way to compare term versus permanent life insurance. Additionally, insurance is really a math computation, so we have to use numbers as part of the assumption and comparison process… so here goes!
Term Insurance Example
Example:
- $2,000,000 20-year level term policy
- Annual premium estimate: $1,200–$2,000
Assumptions:
- Age 35–45, male or female
- Preferred / Preferred Plus non-smoker underwriting class
- U.S. individual life insurance market
Premiums are derived from carrier pricing models based on:
Mortality probabilities are sourced from Society of Actuaries Select & Ultimate tables and insurance carrier-specific experience studies. (2,3)
Permanent Insurance Example
Example:
- $2,000,000 permanent life policy
- Annual premium estimate: $20,000–$30,000+
Assumptions:
- Same demographic profile as term example
- Traditional whole life or guaranteed universal life structure
Premiums reflect a combination of:
Insurance carrier reserve requirements are governed by certain standards and statutory rules, which materially increase premium costs relative to term insurance. (4)
As a final, but critical, element to the comparison is the idea of opportunity cost (i.e., lost opportunity) of the additional premium dollars going into permanent life insurance via the annual premiums. As you can see above, the difference in term and permanent insurance premiums can be substantial. Of course, some of that goes to cash value—as I point out—but that is only a portion of the annual premium. The concept of opportunity cost asks what else you could have done with those premium dollars. If invested, there might be a substantial lost opportunity if those dollars are paid to the life insurance company. If spent on additional lattes, shoes, skincare products, etc. (no judgment!), the lost opportunity might be far smaller.
The Opportunity Cost Comparison
Assume:
$25,000 annual permanent life premium (over the equivalent term policy death benefit)
30 years of payments
Total premiums paid:
If the same cash flow were invested at a 6% real return:
The overall (fairly simplistic) comparison between term and permanent life insurance is not a judgment, nor is it irrefutable. Rather, I am simply looking to highlight the core economic tradeoff:
- Permanent life prioritizes certainty and guarantees
- Term insurance – when adding investing the money “saved” – prioritizes expected value and flexibility
And, while this is far too broad a brushstroke for a conclusion, I think it is generally fair to say that permanent life can be most appropriate in estate liquidity, special needs planning, charitable bequests, or business succession scenarios. But for most working professionals, it is an expensive solution to a temporary risk and, therefore, term insurance is often the better fit mathematically. Now, before EVERY insurance person who you forward this to or who receives my Weekly Whiteboard responds in outrage, let me also make a counterpoint (or counterpoints):
- Term insurance insures for dying too soon. Permanent insurance insures for dying—period.
- Cash value accumulation is “forced” tax-advantaged savings. In other words, the insured is not just paying for insurance—they are building an asset.
- Lastly, and already alluded to above, permanent insurance is a great estate/legacy planning asset. After all, life insurance can create cash inflow at a time when beneficiaries might need those funds.
Again, the goal of this article is to provoke discussion or thinking about planning for the future, not to sell a specific policy… so I encourage all readers to dig deep or ask questions of their financial professional of choice (or their most trusted palm-reader).
I bring long-term disability insurance into this conversation based primarily on the statistically provable fact that, from a probability-weighted perspective, long-term disability is more likely than premature death during working years. For income earners between ages 30 and 55, the probability of death is fairly low. Yes, catastrophic when it happens, but statistically unlikely. This relationship is consistently supported by disability incidence tables, group and individual disability experience studies, and insurance company claims data.(5,6) So, if the probability of a long-term disability is materially higher, shouldn’t those earners consider insuring that risk?
Keep in mind that, most often, disability introduces a dual financial shock—earned income interruption AND increased medical and lifestyle expenses. To be clear, we are not talking about a short-term absence from work and earning. Long-term disability is for major events that have significant, long-term impact on one’s ability to earn income.
As with term vs. permanent insurance, I am not advocating for long-term disability insurance, just provoking thoughts and maybe even actions for some of you. To that end, let me button up this brief section on long-term disability insurance by offering a list (not intended to be exhaustive, just some highlights) of the pros and cons of long-term disability insurance.
Pros:
- Protects future earnings (likely the largest household asset)
Higher probability-weighted expected value than life insurance - Especially critical for:
- Physicians
- Executives
- Business owners
- Highly specialized professionals
Cons:
- Complex policy definitions and rules
- Premiums can be substantial
- Benefit taxation depends on premium funding source
- Benefit caps may underinsure high earners
To put a final point on the long-term disability section: from a purely quantitative standpoint, disability insurance might deserve priority over additional life insurance. But, at a minimum, it should be part of the discussion.
Final Thought(s)
As disclaimed early in this week’s article, I am not a licensed insurance agent nor am I an expert in the insurance arts. But, since I stayed at a Holiday Inn Express last night… (that is a reference to the iconic ad campaign about “staying smart” that Holiday Inn did in the early 2000s). In my opinion, insurance should not be optimized for permanence, guarantees, or emotional comfort. Insurance (whether term or permanent life insurance or disability insurance) should be optimized for economic efficiency and long-term financial and/or legacy planning.
When analyzed quantitatively—through probabilities, present value calculations, and opportunity cost evaluation—the most effective insurance strategy might be simpler, cheaper, and possibly more temporary than conventional narratives suggest. There is a place for all types of insurance—just make sure the insurance you have matches your goals for that insurance. As should be true for many assets in your portfolio or even personal life, each asset should be in place to help achieve a desired outcome. We think about an investment portfolio in the context of risk, return, goals, and objectives—shouldn’t other financial assets be evaluated through a similar lens?
Nothing like a sobering insurance article around the holidays! Spreading cheer as always…
Happy Holidays!
Resources:
https://www.soa.org/research/tables-calcs-tools/
- https://www.soa.org/resources/experience-studies/2015/2015-valuation-basic-tables
- https://www.limra.com/en/newsroom/news-releases/2025/limra-u.s2.-individual-life-insurance-sales-post-double-digit-premium-and-policy-sales-growth-in-the-third-quarter/
- https://content.naic.org/insurance-topics/risk-based-capital
- https://mort.soa.org/ViewTable.aspx?&TableIdentity=1492
- https://www.limra.com/en/newsroom/industry-trends/2025/disability-insurance-awareness-month-is-your-income-protected/
