Why You (Probably) Don’t Need Permanent Life Insurance

Corey —  October 6, 2009 — 5 Comments

       There are only three reasons you would need permanent life insurance coverage. If these situations do not apply to you, then you shouldn’t buy or keep a permanent life insurance policy.

Do These Situations Apply to You?

       You may need permanent life insurance if any of these situations applies to you:

  • You Have a Special Needs Child. – If you have a child with special needs who will still need income after your death and is unable to earn it themselves, you should consider permanent life insurance. You’ll want to set up the policy to pay out into a Special Needs Trust, and you should work with a qualified attorney with specific experience in this area.
  •        

  • Your Estate Will Be Illiquid and You Will Owe Estate Taxes. – If you will have an estate that exceeds the estate tax exemption amount and will not have enough liquid assets to cover those taxes, you should consider permanent life insurance to cover that need. You’ll want to work with an experienced estate attorney and accountant or financial planner to estimate how much you’ll owe in taxes and determine how much insurance you should buy.
  •        

  • You Own a Business with a Partner or Partners. – Permanent life insurance can be used to set up a buy-sell agreement between you and your partner(s). The life insurance will provide the cash needed to buy out a partner after his death. Again, you’ll want to work with an experienced attorney and accountant to value the partner’s share and set up the agreement.



       Those three situations are very specific and apply to only a small percentage of people. That’s why permanent life insurance is a bad idea for most people. If those situations don’t apply to you, then you should only be looking at term life insurance – if you need life insurance at all.

Consider the Source

       If you have a life insurance salesman pressuring you to buy a permanent life insurance policy, ask yourself why he’s recommending that product. If you don’t have a true need for permanent life insurance, there’s a good chance he stands to make a huge commission on the policy and that’s why he’s making the recommendation. The commissions on permanent life insurance policies can be 4-8 times higher than commissions on term life insurance policies, so it’s easy to see the conflict of interest.

       Be open to permanent life insurance if you really need it, but be very wary of anyone who recommends it when you only need term life insurance. Ask why and consider if those reasons are applicable to you. Only make your decision after careful consideration.

Cash It Out If You Don’t Need It

       Finally, if you have a permanent life insurance policy but you don’t need it, then cash it out as quickly as possible. I don’t care if your dad bought it for you when you graduated high school. If you don’t need it, it’s a waste of money. Call up the insurance company and tell them you want to cash out the policy and cancel the coverage.

       Don’t buy something just because it seems like a good idea. Make sure it fits your needs and your situation first. If it doesn’t, then stay away!

Corey

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Corey is currently pursuing a Master of Arts degree in religion. While he enjoys learning and writing about Christianity, another one of his new passions is writing about personal finances in order to help others make wise decisions with their money.

5 responses to Why You (Probably) Don’t Need Permanent Life Insurance

  1. Michael A. Rose October 6, 2009 at 10:47 AM

    As a Christian who happens to be a financial adviser, I must say that these statements are factual. However, there is a need for some sort of permanent insurance. If you have a wise planner who’s looking out for the client’s best interest, he will only provide what’s needed as a piece of the puzzle. Insurance has its purpose. Most people DO need some sort of permanent insurance.

  2. Michael,

    Thanks for taking the time to leave a comment! Would you care to elaborate on why you think most people do need some sort of permanent insurance? What’s your reason for this conclusion?

  3. How about for final expenses? Everybody dies at one point. Nobody knows how much assets you will have at death. My granmother passed away & all her children had to chip in and pay for funeral costs/medical bills because she didn’t have any insurance.

  4. There are better ways to plan for final expenses than permanent life insurance. For example, you could transfer assets to children ahead of time to cover expenses if you think you might deplete your assets before death.

    Additionally, families can keep funeral costs low and reasonable if options are researched ahead of time and they don’t let emotions make all the decisions. You can have a very simple funeral for less than $3,000 with burial and less than $1,000 if you go for cremation.

    Medical bills shouldn’t usually be the responsibility of the family unless someone has cosigned for responsibility of those bills. Medical providers may try to go after the family for the bills, but unless there is a legal liability to pay then the family doesn’t necessarily need to pay them.

    Life insurance and final expenses are too often emotionally-based decisions instead of decisions based on the facts. It can be difficult to separate emotion from death but if you can do that then there’s little need to worry about the cost.

  5. Hmmm..
    1.  Transferring assets to children in advance.  This sounds nice.  I wonder what percentage of adult children, given current economic conditions, would actually leave those dollars untouched? Certainly many would but, also certainly, many would not.

    2.  What happens to mom when dad passes away once they’re retired? What specifically happens to her income sources? Her tax situation? Assuming social security retirement benefits are being received the surviving spouse loses the smaller of the two checks.  How many retired Americans could absorb the monthly income loss that this creates? Most would feel a sharp negative impact, although not all.  Also, what about taxes? Mom is now filing as a single person with one less deduction.  Less income in, a new filing status… it’s not uncommon that she gets a double whammy by having a similar or greater tax burden on less income.

    Those that preach term only really do mean well.  That said, few things in life are so black and white as to say “everyone needs” and “nobody needs”.  Each situation should be examined on its own.

    When in doubt, hire a fee-based planner and have him/her analyze YOUR situation based on YOUR goals and beware the talking heads. :)

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