I’m tired of people beating on permanent insurance. Last week yet another colleague of mine said, “I can’t think of a time when somebody should buy anything but term insurance.”
I told him I could name five.
He scoffed. I listed them off quickly to him, and today I’ll do the same for you.
I hope you’ll be as impressed by the end of this article.
But before I do that, let’s get something clear: my goal isn’t to defend permanent insurance sales tactics. Permanent insurance has been sold poorly by people who desperately need a commission so they hock it (selling is too soft a word….”hock” is a far more appropriate term) to anyone with a pulse.
Because of these unscrupulous practices, the actual product often gets a bad rap. It’s not just permanent insurance…I’ve never found any category of financial instrument to be horrible. Instead, I’ve found plenty of times that the misapplication of the product by the user is horrible. There’s a big difference between the two.
What bugs me most about people’s aversion to permanent policies is that every naysayer I’ve met had no clue how the product actually worked. They were too busy saying it was rotten to actually do their homework. Before people decide to hate something they should give it a try. They might be pleasantly surprised.
Once you know how permanent insurance actually operates you’ll see just how horribly it’s been sold by some salespeople, so let’s move:
5 Great Uses For Permanent Insurance
1) You have children and few assets later in life. If you’re over age forty and having children and need insurance, term life insurance might end up being prohibitively expensive. In that case, a good permanent policy will give you protection into years that term policies can’t touch. There’s bad news here: you’re still going to pay through the nose for insurance, but a large chunk of the money you’re saving will go toward the cash value which will propel the policy into your later years.
2) Estate Planning. High net worth individuals have a great problem: estate taxes. They have so much money that they’ll pay a tax (as high as 55%) on their belongings. Instead of paying those taxes, smart individuals will fund a life insurance policy which is designed to pay the estate tax. Nothing drives me nuts more than a high net worth individual who sets up plans to control estate taxes and then uses term insurance to fund it. Simply put, term insurance will send rich people to the poor house if the insured lives too long. Permanent insurance is the only type that makes sense.
3) Business succession planning. If an owner of a company wants to set up a method to transfer a company to someone who can’t afford to purchase the company today but can pay toward buying it over a long period of time, a permanent life insurance policy is a great method to fund this transaction. That way, if the current owner dies immediately, the death benefit kicks in and goes to the family. If the current owner lives for a long time, the funds inside the insurance policy can be used instead to buy out the owner (or the owner can had over the company and keep the policy). Permanent policies buy flexibility that other buy/sell agreements can’t provide.
4) Conservative financial planning. I really don’t love this one, but it works….I’ve had some clients who are so afraid of their insurance running out that they’d much rather have an expensive permanent policy than cheap term coverage. Generally, these are high net worth clients who take many risks in other areas of their lives and don’t want to be bothered with the risk that their insurance will run out. Is it the most effective solution? It depends on your view of “effective.” If you’re asking, “Does the individual feel more adequately covered than with term?” The answer is an unqualified, “Yes.” That’s a good insurance decision.
5) High net worth tax sheltering. Let’s be clear before we jump into one of my favorite uses of permanent life insurance: I agree that, for most people, insurance shouldn’t be used as an investment. However, if someone is a high income, high net worth individual with tax planning issues, and they’ve already filled their 401(k), their IRA….whatever other tax shelters they have available, they may find themselves looking at annuities. Due to the fact that annuities are awful products to die with and life insurance has huge tax benefits, life insurance beats an annuity hands down. (Maybe I’ll write about this in the future.) Does it work often? I’ll give you an example: my last year as a financial advisor, I recommended this usage exactly one time. In fact, in my 16 year career, I can’t remember more than ten times I thought this was a good idea.
So, what’s the final analysis on permanent insurance? It can be useful, but it’s a much more niche product than it’s usually sold as. If you’re wondering if permanent life insurance is for you, my first thought is, “Probably not.” However, don’t tell me the product’s bad. For those people in the five situations listed above, permanent coverage was the perfect solution for the problem.
Joe Saul-Sehy is the co-host of your new favorite podcast, Stacking Benjamins.
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