For most people, term life insurance is the best choice from a financial standpoint. It covers you when you and your family are vulnerable for a low fee and expires when your need expires. You might be wondering when the need expires. Your insurance representative may say never…. But really? We think your need expires when no one is left financially unprepared upon your death. We like to think of this as being “self-insured.” A young couple with two kids, a mortgage and limited retirement savings would need coverage if one parent dies. Twenty years later, when the kids are grown, the mortgage is paid off, retirement savings are on track and emergency funds are established, the need for life insurance goes away.
There are, however, four scenarios where you may need a life insurance policy to remain in effect for your entire life. Probably the most common scenario we see is where someone’s estate is very illiquid and tied up in real estate or business assets. Think of a farmer with three children. Much of the estate is likely comprised in some combination of real estate, equipment, and animals. If the farmer intends for one of the children to inherit the farm there needs to be permanent insurance in place to pay the siblings their share upon mom and dad’s death.
The next common scenario we observe is when permanent insurance is purchased as part of a buy sell agreement for a small business. If a small business has two partners, they may want a mechanism in place for the surviving partner to buy out a deceased partner’s portion of the business. In this case, each partner would own a life insurance policy on the other.
The third scenario is much less common. If an estate is subject to an estate tax, a permanent policy may be purchased to pay the tax bill. This gets a little bit more complex as insurance is usually held in an Irrevocable Life Insurance Trust. If you have an estate north of $11M, or $22M married, we highly recommend you speak to an estate attorney and a tax professional to explore the possibility of using insurance to pay estate taxes.
The last reason to purchase a permanent life insurance policy is because it just makes you feel good. It may not make the best financial sense, but no one is perfect and if it makes you feel good to have a $10k burial policy or whatever you’d like to leave your family, no matter when you pass, then go for it.
Sadly, permanent insurance is often oversold as an investment. At times the salesperson is licensed only to sell insurance and that one product becomes their solution for all your financial needs. Other times the company compensation model puts the salesperson in a position where they need to sell insurance products to generate income. Many owning permanent insurance unnecessarily report purchasing it from a friend or family member who touted the ability to invest for growth and get life insurance, all in one.
Although, it can be really hard to say no to a friend or family member, we think most should. Investments and insurance purchased for protection are in our view two separate things.