When insurance producers and their clients compare life insurance options, they often focus on the premium: what they pay out-of-pocket each year, known as the outlay. While premium outlay is an important factor (having the cash flow to pay it), it does not tell the full financial story. To make an informed decision, clients and insurance producers must understand the distinction between outlay and net cost, and how this comparison dramatically changes over time.
Term Life Insurance: Outlay = Net Cost
Term life insurance is straightforward: the annual premium paid is the full cost of the coverage. Almost all term products do not build cash value. Therefore, premium outlay equals net cost. Clients pay for temporary protection, and if the policy expires without a claim, the cumulative premiums are simply a cost for coverage, and nothing is recovered (think auto insurance). Your client won The Game of Life, but their life insurance was an expense.
Term insurance is often initially the least expensive way to secure a large death benefit for a defined period, but its affordability can be misleading when viewed across years or even decades. But when clients outlive the guaranteed level premium duration, renewal premiums rise sharply, coverage eventually expires, and the total outlay over time can be significant with no offsetting asset to show for it.
Permanent Life Insurance: Outlay vs. Net Cost (or Gain)
Permanent life insurance generally has two basic financial components:
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Premium outlay (the money paid into the policy)
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Cash accumulation (aka cash value), which grows tax-deferred and can be accessed via withdrawals, policy loans or a full policy surrender.
The net cost of permanent life insurance is calculated by subtracting the cash value received from the cumulative premium outlay. In other words:
Net Cost = Total Premiums Paid – Cash Value Received
This distinction is critical. Over long periods, the cash value can significantly reduce the true cost of coverage. For policyowners who play the long game, the net cost of permanent insurance becomes far lower than term, particularly when coverage is maintained beyond 15 - 20 years.
When Permanent Insurance Creates a “Gain”
In some cases, the cash value can exceed the cumulative premiums paid. When this occurs, the “net cost” actually becomes negative, meaning the policyholder has effectively generated a gain. There was no real cost to owning the insurance (other than the lost opportunity cost of investing the premiums elsewhere).
This potential makes permanent life insurance not only a protection tool but a long-term financial asset.
The Bottom Line
Term insurance is cost-effective for short-term needs. Permanent life insurance, however, offers long-term value that cannot be measured by premiums alone. By understanding outlay versus net cost, insurance producers can guide clients toward strategies that strengthen both their protection and their financial future.
