Permanent Life Insurance: Pitfalls You Should Consider

By Dave Becker, ChFC®

If you want to look after your family’s financial future, you know you need a life insurance policy in case the unthinkable happens and you pass away. After all, that’s what insurance is for. If you’re shopping for insurance, you have two main choices: term life insurance and permanent life insurance.

For many people, term life insurance is more than sufficient. However, some believe permanent life insurance to be more in line with their goals because it can provide lifelong coverage and the opportunity to build cash value.

Going in either direction can help give your family some stability after you’re gone. That said, there are potential pitfalls to permanent life insurance you should consider before deciding.

What Is Permanent Life Insurance?

Permanent life insurance is a type of life insurance policy that covers you for the rest of your life. 

Besides the lifetime coverage, permanent life insurance has a cash value component. While you’re alive, the policy serves as both insurance and a savings vehicle you can withdraw from or borrow against.

There are four main types of permanent life insurance:

• Whole life
• Universal life
• Variable life
• Variable universal life

Depending on your risk tolerance, some of these forms also allow you to invest your cash value. Something worth noting is that you get more costly to insure as you age. As such, the amount of your premium that goes toward the cost of insurance increases, and the amount that feeds the cash component decreases.

Why Some Advisors Recommend Permanent Life Insurance

As is often said, if you want to find the reason for something, “Follow the money.” While I’m sure there are cases where permanent insurance may make sense, I believe insurance agents often recommend permanent insurance over term coverage because, quite frankly, they get paid more for selling such policies. 

With permanent life insurance costing more than term life, some people prefer it because it can pay for itself. The idea is that the cash value amount will build up enough that its interest payment exceeds the premium amount, essentially paying for itself. Unfortunately, the increase of the cost of insurance often eventually exceeds how quickly the cash value is increasing, thus draining the cash value over time. 

Cash value life insurance policies can also carry a tax benefit. This benefit occurs if you need to use some of the cash value. Instead of taking a withdrawal from the cash value, which would be taxable, you’re able to borrow against it, which is not taxable. This can, however, cause your policy some difficulties in the future if not done properly.

Why I Don’t Like It

Despite what many see as advantages of permanent life insurance, I see several disadvantages:

First, there is often an inverse relationship between the amount of insurance a person needs and a person’s age. In other words, when someone is younger, they often need more life insurance than when they’re older. This is because they have fewer assets to protect them in the event of a loss of income or unexpected expense, and because they have longer to provide for loved ones if they pass away. With permanent insurance costing much more than a comparable term policy, many folks are not able to afford an adequate amount of coverage, while they could with a term policy.

Second, I’ve frequently told clients that if they can afford to retire, they can afford to pass away. While that may sound harsh, the rationale is sound. This is because life insurance is primarily used to replace the insured income. So, if a person passes away, their income obviously also stops. Life insurance is often used to replace all or part of the deceased’s income to support the beneficiary’s day-to-day living expenses. If, on the other hand, they have voluntarily given up their salary by retiring, why continue paying for something to replace that income? By then, they’ve accumulated enough wealth to replace their income, eliminating the need for insurance. 

Third, permanent policies are substantially more complex than a term policy. While complexity alone isn’t a reason to not use any product, it does make it more difficult to understand and monitor the policy. This complexity can lead to a misunderstanding by clients on what the policy offers and how it will behave. 

Finally, permanent policies (especially whole life) may not perform nearly as well as other options. This “opportunity cost” is on top of the higher premiums and can be substantial over time.  

Alternatives to Permanent Life Insurance

For the great majority of instances, I’m a fan of “buy term and invest the difference.” Term insurance will often shield beneficiaries until the insured can accumulate enough retirement savings to replace their salary in retirement. Not only will the premiums for this insurance cost substantially less than a permanent policy, the difference in cost can be invested in an account with more return potential than the permanent policy. In addition, by having the insurance and investment accounts separate, the policyholder can more easily monitor the account and manage the amount of risk they’re taking with your investment dollars. In the end, I have yet to see a situation where buying term and investing the difference wouldn’t benefit the client in the end.

Consult a Financial Professional About Life Insurance

If you’re looking for insurance to care for your family after your death, turn to the experienced financial advisors at Keystone Wealth Management. We offer a wide range of financial products to individuals, business owners, and corporations.

To schedule a no-obligation meeting, please get in touch by emailing dave@keystonewealth.com or calling (319) 883-3096. I look forward to hearing from you!

About Dave

Dave Becker is owner, financial advisor, and Chartered Financial Consultant® at Keystone Wealth Management, a full-service financial advisory firm based in Waterloo, Iowa. The firm offers a wide range of financial products and services to individuals, business owners, and corporations to help them pursue their financial goals. As a fiduciary, Dave always places his clients interests above all else. He enjoys simplifying the complex and helping clients move toward their goals and ultimately financial freedom.

Dave provides clear and concise communication, something his clients highly value. After graduating from Illinois State University in 1998, he immediately started helping others with their financial planning. In 2003, he earned the CERTIFIED FINANCIAL PLANNER™ designation (which he voluntarily resigned in February of 2023) and the Chartered Financial Consultant® designation in 2005. Over the span of his career, Dave has guided his clients through some of the most dynamic and uncharted situations for investors, including the burst of the dot.com bubble and the subsequent correction from 2000-2002, the 2008 financial crisis, a global pandemic and interest rates at 41-year highs.

Dave, his wife, Staci, and their four children (Christian, Anna, Carson, and Jonah) reside in Cedar Falls, Iowa. In addition to his work responsibilities, Dave has also volunteered at school, coached soccer and robotics, served as a trustee at church, led a Cub Scout pack, and cheered his kids on in everything they do. He has always said that he makes his best investments at home. In his limited spare time, he also enjoys watching college football and Formula 1 racing. To learn more about Dave, connect with him on LinkedIn.