Should You Consider Permanent Life Insurance?

My wife and I both have life insurance. First purchased when we adopted our children seventeen years ago, we have 20-year term policies. As hard as it is for me to believe, our policies are just a few short years away from lapsing. And that’s caused me to ask whether we would have been better off purchasing permanent life insurance.

Permanent life insurance, as the name suggests, is a form of life insurance that lasts for the life of the insured. It’s distinct from the more typical term life insurance in two very important ways. First, term policies last for a fixed term, typically ranging from one to 30 years. As I mentioned, my wife and I have 20-year term policies.

Second, term policies are barebones life insurance policies. You pay a premium during the term. If the insured dies while the policy is in force, the beneficiaries receive the death benefit. If the policy expires while the insured is alive, there is no cash value. In contrast, permanent life insurance has an investment component above and beyond the insurance. Since a permanent life insurance policy lasts for the insured person’s entire life, a payout is guaranteed. Your permanent life insurance premiums are invested, so the policy accrues cash value.

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While permanent life insurance may sound like a great deal, it comes with hefty price tag. Buy a permanent policy today, and you’re guaranteed to pay a much higher premium than you would for a term policy. While the actual premium depends on a number of factors, premiums for permanent (sometimes called whole life or universal life) policies can be five to 10 times higher then term life insurance. Those extra dollars paid in the early years of a permanent policy get invested and grow. That growth is tax-deferred if the policy is cashed in during the insured persons lifetime. Proceeds are usually tax-free to the beneficiary upon the insured person’s death.

Is Permanent Life Insurance a Good Option?

For most people, most of the time, permanent life insurance is a bad choice for at least three reasons:

  1. Most don’t need it. Most people need life insurance when somebody depends on them for support. This is typically the case when parents are raising children. But fast forward to the couple’s golden years, and the children should be self-sufficient. And with retirement savings and social security, each spouse shouldn’t be depending on the other for financial support.
  2. You don’t control the investments. As promising as permanent life may seem, you have very little control over the investment choices. For this reason, it’s typically better to buy a term policy and invest the difference on your own.
  3. Expense are high. Most insurance companies take a significant portion of the premium in the form of expenses. It’s only what’s left that actually gets invested. These expenses can be steep, rising to as much as three percent or more. This is another reason why investing on your own is generally the better choice.

So when is permanent life insurance a good choice? In some cases you need insurance for your entire life. One example would be if you care for handicapped children. A good friend of ours has two grown children who will need care for the rest of their lives. Because they will never be self-sufficient, a permanent life insurance policy may be a good choice.

There are also tax considerations. Because the proceeds of a permanent policy are often distributed free of taxes, such a policy can be part of wise estate planning. But a tax or estate lawyer should be consulted before making any decisions.

Should a permanent policy be right for you, there a few types to consider:

  • Traditional Whole Life Policies are the simplest, and offer the most guarantees. The premium is guaranteed, as are certain death benefits and cash values.
  • Universal Life Policies have varying premiums (with a guaranteed maximum) and minimum guaranteed cash values and death benefits. Instead of the dividends paid to traditional whole life policyholders, universal policies accrue interest at a credited rate determined each year.
  • Variable Life Policies offer the fewest guarantees, and the highest possibility for increasing in cash value.

Finally, if you are considering a form of permanent life insurance, speak to an insurance expert who is not trying to sell you insurance. An insurance broker would love to sell you a permanent policy because he or she stands to make a substantial commission. That’s not to suggest that life insurance brokers aren’t honest, but you’d be better served speaking with an expert who has no self-interest to bias his or her opinion.

In the end, do your homework, shop around online for life insurance, and make an informed decision. For us, I’m confident we made the right choice with term insurance.

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Published or Updated: July 16, 2012
About Rob Berger

Rob founded the Dough Roller in 2007. A litigation attorney in the securities industry, he lives in Northern Virginia with his wife, their two teenagers, and the family mascot, a shih tzu named Sophie.

Comments

  1. Dave Dorey says:

    I would tend to disagree with this advice on permanent life insurance. Most often, the true return rates on these policies are miserable at best. Most consumer organizations point folks toward fixed rate term insurance. We have two of these policies, the premium rate can’t increase one penny over the 20 year life of the policy. Some of these permanent policies don’t even pay out the accrued amount if the policy holder passes away, they only pay the face amount of the insurance. Bottom line – any life insurance policy that is not fixed rate term in a gamble. You will be much better off down the road to pay off your debt and build an emergency fund than to try to use one of these fancy, high agent commission non-term policies.

    • Rob Drury says:

      Thanks Dave, for your unoriginal (ie, regurgitated) analysis. The only way one determines that “the true return rates on these policies are miserable” is by overlooking that the expense charges which are normally blamed are reasonable costs of insurance and policy guarantees. The raw rates of return are identical to those of the investment vehicles within them. Also ignored are the tremendous tax advantages available only with life insurance cash values.

      You are correct that most term policies today are level term with a guaranteed premium, but the author was obviously referring to the often prohibitively higher premiums that result from renewing a policy after the end of the initial term. Bottom line: There is such a thing as a permanent need for life insurance, though that need does not apply to everyone. If the life insurance need exceeds twenty years, that need is almost always met more cost effectively using permanent insurance.

      Rob Drury
      Executive Director,
      Association of Christian Financial Advisors

    • Josh Thompson says:

      Permanent insurance offers a steady growth with no taxation. If you can find something else that grows with no risk at 4-8 percent a year then please, clue us in. By avoiding taxation on these dollars, you need to understand that this can be the equivalent of 6-10 percent growth in a 401k or stock market type investment.

      Also, having a place where your money can be accessed easily is the best place to put your emergency fund.

      For some reason, people still listen to Dave Ramsey. Besides his get out of debt advice, the guy is ancient history. Step into the 21st century and take a look at the options you have. The market is a horrible place to put your money, and you don’t have to take excessive risk to become wealthy.

  2. Alfred says:

    If you are deciding whether to get a whole life insurance or term insurance, you should look into your situation… assess your needs. Whatever is your option, look at insurance as something that you will leave behind to your family

    • Rob Drury says:

      No; one should NOT assess one’s own needs; one should consult with a properly qualified financial planner or advisor. Neither the individual nor most insurance agents are qualified to perform a proper analysis of life insurance needs.

      • Rob Berger says:

        Rob, while some situations are so complex that seeking professional advice is a must, I’m not sure why most people can’t assess their life insurance needs on their own. There are plenty of tools that can help you determine how much life insurance you need. My wife and I made this assessment on our own, and it wasn’t difficult at all.

        • Rob Drury says:

          While there are plenty of tools that do a questionably adequate job of determining the amount of coverage needed, there are absolutely none that properly determine the type or mix of coverage. Most professionals will provide this type of guidance at little or no cost, so why not consult with one?

  3. James says:

    Choosing between Term Life Insurance and Permanent Life Insurance is often a heated and emotional discussion. There is no doubt that the phrase “buy term and invest the rest” makes sense for many.

    Unfortunately, the reality is that most do not actually “invest the rest” which leaves them with a term policy that either 1) gets very expensive at the end of their term or 2) they just drop the policy altogether and go without life insurance in their later years. (Of course, this is when they are most likely to die)

    Now I can make a case for going either way, but what it all comes down to is personal choice and freedom. Saying that Term life Insurance is “The” right way for most people to buy life insurance is like saying that everyone should drive the same kind of car. After all, it will probably get them from point a to point b, until it doesn’t any more. Then you have to go out and buy a different car.

    The key is in actually talking with a knowledgeable, licensed professional who is able to understand not just what your “needs” for life insurance are but take into consideration your “Wants” as well. Life insurance calculators and online quoting engines have a hard time helping you determine what your Wants actually are.

    James

  4. J says:

    When I decided on 20 year term life insurance I made the bet that my net worth would exceed the benefits after 20 years. If I felt like it would take 30 years I would’ve increased the term. If I were in a dead end job without any retirement I probably would’ve gone with permanent (but the catch22 is someone with little future net worth probably can’t afford permanent).

    • Rob Drury says:

      J, you’ve completely missed a critical perspective in your planning. You’ve made a not-so-safe assumption and acted upon it. The primary purpose of insurance is risk management; to ensure that the financial consequences of an adverse situation are minimized. You’ve decided that you need life insurance for only 20 years because your family will be financial equipped to handle the loss of your income in 20 years. Says who? It is a virtual guaranty that life will not hand you the scenario you envision. Also, if your perceived need was greater than 20 years, term would typically be a less cost effective option. Let me give a personal example:

      At age 30, I purchased a $100,000 participating (dividend-paying) whole life policy. I also had a significant amount of term offered through my employer. I stopped paying my roughly $1000 annual premium after eight years. I have now owned the policy for 20 years, and the death benefit is still roughly the face amount and will likely be so until my death. I can leave it in force for life and pay the death benefit to my children, surrender it today for around $14,000 (which will likely continue to increase), or I can sell it when my life expectancy reaches 10-15 years for around 4-5 times the cash value. If I had purchased a 20-year level term, I would have paid a total of about $4000-5000 dollars in total premium and had nothing to show for it. If I had purchased a 30-year term, it would have cost me more in total premium than I paid for my whole life.

  5. Ken says:

    You forgot to mention that permanenet or whole life policies purchased at a young age with a fixed premium are an option to assure that your heirs will have funds to pay legal fees to settle your estate and pay off outstanding debts thereby relieving them of that financial burden.

    What is your view on purchasing longterm care insurance?

  6. Doug says:

    I find the comment about buy term invest the rest is a little short sighted. Insurance companies invest in long term investments, typically interest based investments such as mortgages. These investments are more stable then say STOCKS. what we have seen in the stock market is volatility. Investment firms such as Morgan Stanley and Goldman rely on volatility to make money. They rely on positions being opened and closed and use grey markets to liquidate many of these positions that do not show up in normal trades. There are so many layers of people trying to make a commission that your stock investments are at risk all of the time. There is too much incentive to oversell a stock. Banks make billions on interest and if they are doing it, maybe you should too. Buying a small paid up whole policy and including “enhanced Paid up Additions” can build a very nice nest egg. With rates so low, now is a great time to get into these types of policies as insurance is still the most important part of the family plan, but the benefit of a whole policy is that at the end, there is a hefty sum that can be tapped for retirement. it is a conservative approach that accomplishes many important goals. The stock market will continue to change at a far faster pace as a result of the obsolescence of technology. Where is digital equipment, polaroid, Compaq, Circuit City, The post office. Buying substantial amounts of mutual funds is risky as they may hold positions that cannot keep up with technology and will end up like many names we grew up with. Interest based investments are here to stay, and they deserve a second, third, fourth and final look, but when prrotecting your family is a high priority, you can have your cake and eat it too with a good quality whole policy, with enhanced paid up additions!

  7. Nancy Kurtz says:

    First, I liked the article. I have a hard time deciding whether I need life insurance and I saw one place where it was saying that if your kids are grown you may not need insurance. I do not carry life insurance as I have prepaid cremation services and the rest of the funeral services is a waste. i will not go into what I want in this forum, just suffice it to say I don’t think that I need insurance. Please make sure the readers understand that insurance companies are making profits. They use actuaries and analysts to determine the odds of you dying. The insurance companies will always win.

    I think it is better to invest the money on a monthly basis and watch it grow. Young people investing today on a regular basis would have a sizable amount by the time they are 70 or 80. Of course the insurance selling point is the foreseen. this is true, but many people do not buy enough insurance to cover “the unforeseen.” So the spouse and kids are still left high and dry.
    I was a little surprised to see that most of the comments are from 2010-2011. I guess it goes to show that nothing has changed in the insurance business.

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