The desire to take care of our loved ones is powerful. Mix that instinct with a topic that can be uncomfortable (who wants to think about their own death?), life insurance products that can be confusing, and it’s unsurprising that many people get taken advantage of.
The systemic over-selling of permanent life insurance is a big problem. People get locked into policies that either make no sense for them or are not the best option available to them.
Permanent life insurance = more expensive annual premium payments, pays a benefit WHEN you die. Comes in many “flavors” that have different names, including “whole life”, “universal life”, “variable life” among others.
You often see “permanent” and “whole” used interchangeably, but “whole life” is actually a type of permanent life policy, just like “universal life” is a type of permanent life.
Term life insurance = less expensive annual premium payments, pays a benefit IF you die during a fixed period of time (the "term") . The alternative to permanent.
The facts are clear: even the industry’s own data shows that 40-50% of people give up on* the policy within 10 years; after 20 years, that percentage climbs to 60-75%.
If you drop a permanent life insurance policy in the first 20 years, you have not done well. Sadly, cutting your losses is often still the best available choice - when I teach a class on insurance at Harvard Business School I walk through a real-life example of a young alum of an elite business school who was still better off taking a 40% loss of his money than sticking with the policy.
During the first 10 years of a permanent life insurance policy, you are almost certainly losing money (often a lot). If you drop your life insurance during years 11-20, the outcome is typically between a loss and an anemic return.
Think about that for a moment: 40-50% of people would rather lose a bunch of money than keep the insurance, and another 20-25% of people stick around for another 10 years to get by with a smaller loss or pittance of a gain.
That means this product disappoints around 60-75% of people who buy it.
This is dysfunctional.
So what’s going on? People getting paid.
The commissions on permanent life policies are much bigger than on term life. Unsurprisingly, big paydays for selling permanent have spawned a bunch of well-honed sales lines.
Not everyone who buys permanent is getting ripped off, and it’s entirely possible it’s right for you. Our interactive Life Insurance Guide, walks you through a clear, efficient way to think about whether it’s worth considering in your situation.
“BS vs. Truth” scale
Let’s rate some of the most popular permanent life insurance sales lines on our “BS vs. truth scale” - I believe I can safely say our "turds vs. flowers" framework is an industry first.
= total BS, really doesn’t make sense
= mostly BS, has some grains of truth
= true in some situations, BS in others
= true, but can be misleading
= true and sensible (but watch out for “misuse!”)
A Quick Bit of Background
Unlike term policies (where you hope your loved ones never receive a check from the insurance company) you’d buy a permanent life insurance policy because you want to pay money to the insurance company in exchange for your heirs getting the death benefit when you die. As the old adage goes, nothing is certain except for death and taxes.
Any permanent life insurance policy is an investment of sorts: you put money in (premiums) and your heirs get money out (the death benefit).
Some (but not all) permanent life insurance policies have "cash value", which is money you can access while you're still alive.
This concept of life insurance as an investment underlies a number of the sales lines we’ll explore.
“Now that you’re a baller / wealthy / high earning …”
So your insurance agent probably didn’t use the term “baller” but if they did, (a) that’s cool, and (b) that in no way enhances the credibility of their arguments.
Being high earning (relative to your expenses) and/or wealthy is necessary but not sufficient: permanent life insurance should be considered only if:
- You are already saving enough money that you're max'ing out contributions to the "obvious" tax-advantaged places you should save (like a 401k), and
- You are ready to carve out a chunk of your wealth for future generations to use after you’re gone
It’s also entirely reasonable to conclude that – despite being high-saving and/or wealthy – there are other uses of your money that are better-aligned with your goals, or simply represent better risk-adjusted return than what you could achieve with a permanent insurance policy.
If you’re worried about having a taxable estate at the Federal level (in 2019 it’s $22.8mm for a couple married filing jointly or $11.4mm for an individual...currently, the law is set to cut those amounts in half in 2026) - or you live in a state with lower limits - then life insurance can be a way to achieve your estate planning goals (be sure to engage a qualified attorney for the legal structuring component). Even in this situation, it's important to run the math on how much (if anything) you'd actually gain with a trust structure, taking into account legal fees and your own cost of capital.
“You’re throwing money away on term”
This line is total BS and yet it is incredibly effective - we see the "fallout" from its appeal a lot here at AboveBoard when people come to us with totally inappropriate life insurance coverage, trying to figure out better options.
I can assure you the insurance companies are not confused – they didn’t fail to understand there’s a 100% probability that all humans die at some point.
Term is much cheaper than permanent precisely because it is unlikely you will receive a payout, and that’s great because you really don’t want one! The odds are in your favor that you will survive the entire term and thus never receive a payout. Term life insurance is like homeowner's or auto insurance in this way: you buy it to have protection if something bad happens, not because you expect a payout.
You pay premiums on a term policy only for insurance (IF you die during the term, your loved ones will get enough money to live the life you'd want for them). That is a totally different product from permanent life insurance, which puts a contractual obligation on the insurance company to pay money whenever you die.
"Think about your future self"
This is great advice generally -- getting a dog, eating a burrito, considering permanent life insurance...any decision, really. As people age and enter a life stage where they can name more than one or two close friends who have passed away, "leaving a legacy" often starts to matter more.
And buying permanent life insurance while you're young is indeed less expensive in terms of annual payments than when you're old. But importantly, the rates of return (which is frankly what you should really care about) are often the same - and sometimes even slightly better if you wait until you're older, assuming your health history (e.g. you get a cancerous mole) and lifestyle risk profile (e.g. you take up car-racing) don't worsen.
That assumption is a big gamble and one we generally don't recommend taking. Thankfully there's a good middle ground, one we often recommend here at AboveBoard in our independent insurance brokerage: if you feel like your earnings trajectory or wealth level might justify permanent life insurance some day, but it does not make total sense today, then you should upgrade to one of the best-quality conversion options (the right to convert your term insurance to permanent insurance without having to prove you're insurable).
But watch out for misuse: "leaving a legacy" does not require permanent life insurance. Perhaps a legacy takes the form of funding a donation to your alma mater, a vacation home you leave to your heirs, or funding 529 plans for (future) grandchildren. (We analyze these options in AboveBoard's fiduciary investment advisor, and will highlight alternative options to our insurance brokerage clients.)
If you are financially on track for the life you want (including retirement), then it's worth putting permanent life insurance on the list of things to consider, but it should be considered in the context of multiple options.
“The tax advantages are AMAZING…”
Permanent life insurance often gets presented as a great choice because of "the tax advantages". There is definitely truth in the assertion that life insurance has tax advantages, and in some situations those tax advantages appropriately justify the purchase.
The problem is that in many situations, the tax advantages don't justify the purchase. Many people who bought permanent policies fundamentally misunderstand what the tax advantages actually are (sometimes because they were given incorrect information).
The details of what the tax advantages are is a topic for another post, but the key point here is that you cannot focus on the tax advantages in a vacuum - the proper analysis includes all the factors that ultimately affect your and your heirs' rate of return on the policy across multiple scenarios (taxes are one factor, but investment performance, rates of return only underlying asset classes and your own opportunity cost matter, too - and sometimes more than offset "the tax advantages").
“Why rent when you can buy?”
Seriously, don't ever buy an insurance policy because you're moved by this this line. It's total BS.
It misses the fact that you're not "renting" anything with term life insurance - you're buying protection against a bad event. (Are you "renting" homeowner's insurance? No. You are buying protection against something going wrong. Same deal with term life insurance.)
This line illustrates a tactic for manipulation: speak to an emotional inclination or bias, regardless of whether it’s factually accurate or relevant.
The real question is: do you only want to buy insurance, or do you want to blend insurance and investing? That is a valid question, but there is nothing that – by definition - makes blending insurance and investing better than keeping them separate.
“Protect your family forever”
Everyone wants to protect their family forever. But you don’t need permanent life insurance to do it.
You do need to protect your family from the risk that the financial support or unpaid care you provide suddenly “disappears” prematurely – a breadwinner dies when the family still relies on that breadwinner’s income, or a care provider dies when the family would need to hire paid caregivers to help out. Term insurance will usually achieve this for you.
However, if you’re looking for protection longer than 30 years, you can encounter a limitation with term . There are some 35 year term or “until age 75” policies on the market, but there are few and the pricing is often not great. Check those out, but you should also consider permanent if you definitely need insurance for more than 30 years.
If you want "protection forever" and do not care about having any cash value, the Guaranteed Universal Life ("GUL") is often a great choice. You can think of it as "term for life". If your goal is primarily to transfer money to future generations and you do not assign much value to having the option to access cash value during your own lifetime, GUL is often a great option.
Our Life Insurance Guide helps you figure out the right term, and whether you should consider permanent.
“You can borrow from yourself”
It is true you can borrow against the cash value life insurance policies. Sometimes this feature gets marketed as "cheaper than the rates on credit cards or consumer loans" - but so what? If your financial situation is such that you rely on credit cards or consumer loans, then you should definitely not be considering permanent life insurance at this particular time.
For people who have no debt or only carry a mortgage, it's still not obvious that borrowing against a life insurance policy is your best option. A loan (and associated charges) ultimately affects the rate of return you and our heirs achieve with a life insurance policy; it's simply a question of running the math to understand whether a permanent policy is the best way to achieve your goals.
You can save money in a brokerage account and "borrow from yourself" for free at any time. No paperwork, no expenses or interest charges. Yes, you may pay some long-term capital gains taxes and you bear the risk that the value of your money could go up or down. But these different factors are all analyzable - your goals, time horizon and tolerance for risk all determine the right answer for you.
You can also withdraw your contributions to a Roth IRA at any time and without penalty (penalties happen in most cases if you take out gains before age 59 ½).
“You stop paying after  years!”
It’s true that many permanent life policies have specific payment periods where you stop “cutting a check” after a defined period.
What continues on – and is often poorly disclosed or glossed over – is that the insurance company continues to debit your account for an amount related to administrative and mortality expenses.
Think of it this way: if I said “I’m going to link up to your bank account, and pull money out each month”, would you say that you’re paying me?
Yes! You are definitely paying me in that scenario. If I am removing money from your account and not giving it back, you are paying me, regardless of whether you had to proactively send a payment (vs. authorizing me to pull money out of your account).
Ultimately, the thing to focus on is the internal rate of return on the policy. Look at both the guaranteed and current values (and other scenarios).
“There’s a guaranteed rate of return!”
For many permanent life insurance policies, this is entirely correct. And the right way to think about this is always: a guaranteed rate of return is worth something, it is not worth anything.
If the sales pitch crosses into “…and therefore we don’t need to compare this policy to buying term and investing the difference” then the rating would flip to You always need to run the comparison, and make an informed choice from there.
What are the life insurance sales lines you’ve heard? Drop me a line at email@example.com
*When we say “giving up on” a permanent life insurance policy, we’re referring to when a consumer allows a permanent life insurance policy to “lapse”, which basically means the consumer decided they are either no longer willing or able to pay for the policy they initially bought. To get technical, the US Individual Life Insurance Persistency Study (released 2012) by the Society of Actuaries and Life Insurance Market Research Association, defines “lapse” as:
For purposes of this report, lapse includes termination for nonpayment of premium, insufficient cash value or full surrender of a policy, transfer to reduced paid- up or extended term status, and terminations for unknown reason. This is consistent with the definition of lapse applied to other LIMRA and the Society of Actuaries experience studies.