Why Most People Don’t Need Permanent Life Insurance
Permanent life insurance, which includes whole life and universal life policies, is frequently promoted as a necessary component of everyone’s financial plan. Insurance agents tout the policies’ lifelong coverage, tax-advantaged growth potential, and “forced savings” feature. However, permanent life insurance is complicated, expensive, and often not the best option for the majority of people. Permanent policies may be appropriate in a few situations, but for the most part, people should avoid these products.
What is permanent life insurance?
Permanent life insurance covers you for the rest of your life, as long as you continue to pay the premiums. The policy includes an investment or savings component, which allows the cash value to accumulate tax-free over time. Some common types of permanent policies are:
- Whole life insurance offers lifelong protection and minimum guaranteed cash value growth for fixed premiums.
- Universal life insurance provides flexible premiums, adjustable coverage, and cash value growth based on market interest rates.
- Variable life insurance invests cash value in market subaccounts, which can result in higher returns but higher risk.
Permanent policies typically cost 7-10 times more than term policies for comparable death benefit coverage. Higher premiums fund the savings component, allowing the cash value to increase. However, this savings component generates significant commissions and fees for insurance agents.
Case Against Permanent Insurance
There are several reasons why permanent life insurance is not suitable for the majority of individuals and families:
It is too expensive for the coverage provided:
The primary benefit of life insurance is that it protects your loved ones financially if you die prematurely. Permanent insurance rarely makes sense because its primary purpose is solely to provide death benefits. Term life insurance offers more coverage per premium dollar, allowing you to purchase 7-10 times the death benefit.
If you take full advantage of the savings and investment features of a permanent policy, the additional cost may be justified. However, most buyers never take advantage of these additional benefits. They pay significantly higher premiums for the same basic coverage they could have obtained through term insurance.
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It is Often Used as an Expensive Savings Account
Insurance agents promote permanent insurance with buzzwords like “forced savings,” “tax-deferred compound growth,” and “financial stability.” These features may sound appealing, but the high fees frequently stifle any genuine growth potential. Investing the difference in premiums between permanent and term insurance typically yields significantly higher long-term returns.
The most effective way to save and accumulate wealth is to maximize dedicated retirement accounts such as 401(k)s and IRAs. These offer the same tax-deferred growth without the high insurance fees and limitations. To increase your wealth, invest in stocks, bonds, mutual funds, and real estate on your own.
It Has Product Complexity and Hidden Costs
Permanent life insurance has many moving parts that most buyers do not fully understand before signing the dotted line. Projected returns frequently make unrealistic assumptions or fail to account for significant hidden fees.
In practice, actual performance typically falls far short of the illustrated projections provided by insurance agents. Frequent policy lapses indicate that buyers do not understand or cannot afford the true long-term costs. This product’s complexity makes it easier to be misled about expected results.
It Primarily Benefits the Agent and not the Client
Insurance agents earn extremely high first-year commissions on permanent policies, frequently exceeding 50-100% of the first year’s premiums. They have an incentive to push these high-cost products that generate more compensation for themselves, even if cheaper term insurance is the better option.
Permanent insurance can be useful later in life for high-net-worth individuals who need tax sheltering. However, it generally functions as an expensive investment linked to insurance. This muddles the priorities of most working-age buyers who require only death benefit protection.
When is Permanent Insurance Appropriate
Despite the disadvantages listed above, there are a few circumstances in which permanent life insurance may be appropriate:
Business Buy-Sell Arrangements – Using life insurance to pay for a deceased partner’s share of a business.
Estate Planning for the Ultra-wealthy When death benefits exceed several million dollars, tax benefits become increasingly important.
Charitable Giving – Creating a policy to donate to a charity tax-free after death.
Chronically Ill Insured – May help supplement expenses when unable to work and earn a living.
Term life insurance or guaranteed universal life are better options for the majority of common individual and family insurance needs. They guarantee death benefits for a specified period of time at the lowest possible cost. According to life insurance ownership data, this category encompasses more than 90% of the population.
Alternatives for Permanent Insurance
Here are some viable alternatives that build cash value while avoiding unnecessary insurance premiums.
- Whole or Indexed Universal Life: More affordable permanent options for the above-mentioned needs.
- Dedicated Investment Accounts – Use self-directed retirement and taxable accounts to better meet long-term savings goals.
- Retirement Accounts – First, maximize your 401(k), IRA, HSA, and other dedicated retirement savings options.
- Robo-Advisors – Automated investment platforms that provide portfolio management with low account minimums and fees.
Rental real estate generates monthly cash flow and appreciation over time, with favorable tax treatment.
In most cases, relying solely on term life insurance with aggressive savings and investing is the best strategy. It effectively separates the needs for protection from the accumulation of long-term wealth. Shop for competitive term insurance rates online, and then invest the premium savings.
Conclusion
Permanent life insurance is an overcomplicated and overpriced product promoted aggressively by insurance agents who earn high commissions. For the majority of people, term life insurance combined with separate retirement and investment accounts is a simpler and more effective way to achieve financial security and growth.
Before committing to any type of permanent insurance, thoroughly research all available options, run your own illustration projections, and seek unbiased fee-only advice. Never accept product recommendations solely from an agent who makes money from commissions or proprietary product sales. Make sure you understand how the policy works and weigh the benefits and drawbacks based on your own specific situation and needs.
