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!
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