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Were You Sold Permanent Life Insurance?

Life insurance is an incredibly important tool for financial planning. By purchasing the right amount of life insurance, a client is able to financially protect their family in the event of premature death and ensure the financial stability of the family. This is the primary purpose of life insurance, just like homeowners insurance: when your life catches on fire, life insurance is there to make a family financially whole again. This can be accomplished using term insurance and purchasing a lot more of it than you think you need. 

The problem I often encounter is that people have been sold incredibly expensive permanent life insurance policies that were sold as an “investment”. The idea that permanent life insurance, whether it’s a whole life or universal life policy, is a good investment is a story brought to the world by life insurance companies. Because a policy owner can take loans against the cash balance in the policy tax-free, it often gets pushed by salesmen looking to make ridiculously high commissions on these products. 

This is not to say that permanent life insurance is evil, because there are definitely needs for permanent life insurance, but it’s not for the tax-deferred growth benefits. No matter how hard I actually look at the numbers, they just don’t add up to me.

A whole life policy is great for high-net-worth individuals or family that is expected to have a taxable estate. But with the estate and gift tax exemption sitting at $11.58 million for 2020, the amount of estates that are affected by the 40% estate tax has shrunk considerably.1 There are also a ton of gifting strategies that should be incorporated into the estate plan that will lower the taxable estate as opposed to buying expensive life insurance.

A permanent policy is also great for a parent that owns a business with multiple children and not all of the children are expected to inherit the business. The life insurance policy can be used to level the estate and provide an asset of comparable value as the business.

For both of these permanent life insurance scenarios, we are likely talking about significant death benefits that are likely being purchased and it’s because there is a calculated need for that benefit to be there at death. The owner of that insurance policy understands that they are going to be trading a very large amount of money each year in life insurance premiums for the guarantee of a much bigger dollar amount at their death. 

Because life insurance receives favorable tax treatment, insurance agents spin the idea that investing inside a life insurance policy is somehow this magical investment vehicle that is a hidden secret in the investment world. What they don’t tell you is that any of the tax advantages that you get from investing inside life insurance is quickly forfeited in high fees, bad and overpriced investments, high commissions, surrender fees, and a general lack of liquidity.2 You also don’t have access to all the money inside the life insurance policy because a large portion of the money must stay in the policy unencumbered by loans to keep the policy from lapsing. If the policy lapses, then all the money that was taken out via a loan becomes taxable as ordinary income. This could be a nightmare situation.

So if you have already been sold a permanent life insurance policy and have a significant amount invested in it, then you might be wondering what options you have? The good thing is that you can talk with a fee-only planner like me that can give completely unbiased and fiduciary recommendations on how to unwind these policies.

Thayer Financial, L.L.C. (“Thayer Financial”) is a registered investment adviser offering advisory services in the State of North Carolina and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. The presence of this website on the Internet shall not be directly or indirectly interpreted as a solicitation of investment advisory services to persons of another jurisdiction unless otherwise permitted by statute. Follow-up or individualized responses to consumers in a particular state by Thayer Financial in the rendering of personalized investment advice for compensation shall not be made without our first complying with jurisdiction requirements or pursuant to an applicable state exemption.

All written content on this site is for information purposes only. Opinions expressed herein are solely those of Thayer Financial, L.L.C., unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to other parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.

CFP Professional XY Planning Network NAPFA Fee-Only Network Financial Planning Association

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