Why Is Permanent Life Insurance Bad?

Most other websites that publish information about permanent life insurance will insist it is ALWAYS a bad idea. The implication is that no one needs to have life insurance that sticks around forever. In fact, most financial gurus, mega personal finance websites (nerdwallet, valuepenguin, lifeant, Nasdaq etc.) all agree that term life insurance is superior.

Why is that? Well, if you boil down the opinions of these sites and the writers of their content, you will find one major reason: term insurance is cheaper, therefore it is better. That sets pretty narrow criteria for everything if we use that logic.

If we follow it in other major financial decisions, I guess that means buying an 89 Chrysler Lebaron is a better choice over a brand new Volvo. Why is that? Well, because it’s cheaper and after all a car is only good for getting you from point A to point B so why spend all the extra on a new, expensive one?

Hopefully, you can detect the sarcasm in the paragraph above. The danger in always boiling everything down to a price is that it leaves out any consideration for determining value. Someone told me years ago, “price is only relevant in the absence of value”.

A major component in creating value by paying life insurance premiums is created when you die and your chosen beneficiary receives a check for the death benefit that you purchased. Why would you not want to have life insurance that is guaranteed to pay a death benefit when you die? That’s a good question and one that this website has been grappling with since  2011.

What is permanent life insurance?

First, we should define permanent life insurance to make sure that we are all on the same page for the rest of the discussion.

It is really not a particular product but more of a general term to describe any type of life insurance that is designed to be around permanently as long as you pay the required premiums. It can be whole life insurance like the policies we discuss here on this site quite often—those designed to minimize the death benefit and to maximize the cash value accumulation.

Or it can be any type of universal life insurance—including guaranteed universal life, current assumption UL, indexed universal life (IUL), or variable universal life insurance (VUL). Yes, each of these products has different mechanics and there are entire groups of people dedicated to promoting the pros and cons of each. But that is not the purpose of this article at all.

Each of those products is considered a type of permanent life insurance and they can all work well for people that choose to own them. The caveat, as always, is that you have a competent life insurance broker design and implement your policy to ensure that you are getting exactly what you want and that you are funding the policy correctly so that there will actually be a permanent death benefit—meaning the policy will be around when you die to pay your beneficiary(s) as you wish.

Premium payments continue for many years

One of the major cons that are detailed by the major financial websites is that permanent life insurance is bad because the premium payments go on for too many years. While it is true that permanent policies can be designed to go on forever (or at least until you die), that is not typical. In fact, most of our clients choose to pay their premiums for a finite period of —10 years, 20 years, or in some cases as few as 5 years.

To suggest that the premiums must continue for a long duration indicates that whoever is writing these articles has very little to no understanding of how permanent life insurance actually works.

Honestly, I believe that our opinions about term insurance and permanent insurance are more shaped by our actual field experience working with clients. Most other content online is written by professional writers who are paid to write.

Just a few days ago, I sat down with a potential client who was looking at some term life insurance options. You know what their major objection to it was? That after 20 years (in this case) they no longer had any life insurance. And though their need to replace their income for their children would no longer exist at the end of the term, they still wanted to have insurance for estate settlement and to leave some legacy for their family.

But Whole Life and Universal Life are too complicated for most people

It does take a little investment of time for most people to wrap their heads around whole life or universal life insurance. However, I do not believe that you need to understand your policy on the same level that I, a broker with over twenty years of experience understands it. That is not a realistic expectation for most people to have.

I would venture to say that most people don’t truly understand how their mortgage works or the difference between buying your home with an interest-only HELOC versus a fully amortized 30-year fixed mortgage. But that does not mean that either is too complicated, it means that you need to work with a competent resource who can help you way the pros and cons.

A basic whole life insurance policy is far from complicated. You pay the required premium for the death benefit you would like to have and the policy pays the death benefit when you die. Very simple. A basic universal life insurance policy works in a similar fashion.

Is term life insurance is better for most people

There is an argument to be made that term life insurance is the better option for most people. At least, to the extent that you have a very limited budget and life insurance need that must be met.

My “go-to” example here is a married couple where one spouse has a job outside of the home and the other spouse handles household responsibilities along with children. In most cases, these people are typically in their late 20s, have a limited income, high expenses, and probably are carrying a decent amount of debt. One of my friends refers to this time of life as the “compression zone”. Aptly named.

There is a large need for life insurance here because you have one spouse who earns all the money for the household and if they were to die, the surviving spouse will need a lot of money to provide for the needs of their children and of their household for a decade or more in most cases.

This is a textbook application for term life insurance. For something less than $50/month in most cases, the couple can buy several hundred thousand dollars worth of coverage.

You should always make sure that you are covering your need for life insurance death benefit prior to buying an overfunded whole life insurance policy (for example). Keep your priorities in order.

Let’s put a bow on it

Permanent life insurance is not bad when viewed as a product. It provides a death benefit that will last your entire lifetime provided that you pay your required premiums.

There are times that permanent life insurance is used in a bad way. If you are on a limited budget and have a large need for life insurance, permanent life insurance is probably not the best solution for you. Be sure that you are buying the right life insurance policy for your given situation and you will be on the right path.

If you need help determining what is going to work best for you, please reach out to us. We help people from all across the United States figure this out every day and have been doing with this website for nearly 10 years.

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