The life insurance debate

There are a number of debates that seem to never end within the financial planning community. One of those debates relates to life insurance. Before I get to the thoughts expressed by people on each side, I’ll lay some basic groundwork.


What is the purpose of life insurance? Generally speaking, it is to replace income or financial value that would be lost if someone were to pass away. The main use I see is for individuals to purchase coverage as income replacement for those who depend on that income. There is also a need for non-income earners such as stay-at-home parents who provide many services that would have to be hired if they were to pass away. There are other uses as well, but income replacement is the most common.


Types of life insurance:

Term Life - As the name suggests, term insurance provides coverage for a certain period of time, or term. For instance, a 20 year term policy will provide coverage for 20 years and assuming you outlive that period of time, the coverage ends. The idea would be that you reach a point of financial independence and no longer need the insurance coverage. Term insurance is the lowest cost form of life insurance (other than possibly a group policy through an employer, but I’ll save that for another discussion).


Whole (or Permanent) Life - Again, as the name suggests, this coverage is designed to remain in place for your entire life. Since the insurance company knows that one day they will have to pay the death benefit, the coverage is going to cost significantly more. This form of insurance can become complicated very quickly as insurance companies have designed many different products, some offer additional features beyond the death benefit, such as investment and tax benefits.


Fans of term insurance will say to buy term insurance for low cost coverage and keep your investments separate, commonly expressed as “buy term and invest the difference”. This is a lower cost and simpler approach that I generally agree with. Those who tend to favor whole life insurance highlight the cash value potential that can build within the policy which you may be able to withdraw or take income in tax preferred ways. Those features sound good, however, they come at a higher cost.


My thoughts:

For most cases I recommend term insurance coverage. In my experience term works out better than higher cost and more complex whole life policies. Though, there are a few exceptions where permanent insurance can make sense and actually be a very useful tool.


Consider permanent life insurance for the following situations (note that it isn’t for traditional income replacement as I had described above):


Estate planning – Permanent life insurance can provide tax benefits when coordinated with a well-designed estate plan. With the estate tax exemption for 2017 set at $10,980,000 for a married couple, most families don’t face estate taxes, however, for those who do, the 40% rate can be a killer. Many people with an estate above that amount also own many illiquid assets such as real estate or businesses, so the insurance can provide a second benefit of liquidity in addition to escaping estate taxes (again, when properly coordinated with their estate plan).


High income earners – If you find yourself in a high tax bracket and you have already maxed out the tax advantaged savings vehicles available to you such as a 401k, IRA, Roth IRA, SEP IRA etc., and have cash left over looking for a home then a permanent insurance policy may make sense. However, it’s still not a slam dunk decision. There are other investments that can be very tax efficient and avoid the higher cost of permanent insurance. If you are willing to accept potentially low to moderate returns for tax and diversification benefits then you may want to explore a permanent insurance policy.


There are many unique financial situations so I don’t claim for this to be an all-inclusive list. However, these are the situations I see most frequently in my practice.


If you have any questions or a policy that you’re curious about feel free to contact me for a complimentary review of the policy. Requesting an “in-force illustration” can show how your insurance policy is performing, and provides a good starting point to decide if it’s worth keeping in place.



Securities America and its representatives do not provide tax or legal advice; therefore it is important to coordinate with your tax or legal advisor regarding your specific situation.

The opinions and forecasts expressed are those of the author, and may not actually come to pass.


Advisory services offered through Arbor Point Advisors. Securities offered through Securities America Inc., Member FINRA/SIPC. Arbor Point and Securities America are separate companies. CA Insurance #0E88557

Rancho Bernardo Financial Planner