I never aspired to be an insurance salesman. I ended up in that role because the barriers to entry are non-existent, and more importantly, because I didn’t have other options. Like a lot of young people who enter that world, I was chewed up and spit out in a short period of time.
In any industry where the seller’s livelihood depends upon commissions, they are incentivized to sell the more expensive product, in this case, permanent life insurance. I got a front row look at how this drives behavior, so insurance has been a dirty word in my mind since I left the industry.
It took a few years but I realized that my personal experience blinded me to the reality that people have insurance needs. Permanent life insurance is the nail to every salesman’s hammer, but that doesn’t change the fact that there are situations where it is appropriate. I wanted to share this side of the story. Well, really my colleague Jonathan Novy wanted to share this side.
Jonathan spent years at an insurance company, and while he believes that term is usually the appropriate option, below he shares how permanent insurance might fit into somebody’s financial plan.
Fiduciary advisers consistently and rightly make intelligent arguments against permanent life insurance. My colleague Blair DuQuesnay makes it here, and Peter Lazaroff also does so here. I agree with everything they say.
Often overlooked are arguments in favor of permanent life insurance. There are legitimate best interest uses for permanent insurance which are regrettably buried beneath aggressive and pushy sales practices, slippery comments about taxes and cash values, and banking on yourself. I’ll avoid that garbage and make the clear case for when permanent insurance is a good fit.
Two ideas must be kept front and center. First, no one needs insurance. Rather, people have risks they need to manage. Insurance is simply a tool advisors employ to help manage those risks. Second, people generally buy insurance because there will be a financial impact on their family or business were they to die or get disabled. If that impact will be felt when term insurance is no longer a viable option, then permanent insurance is absolutely a consideration. This happens more often than one might think.
At no point here am I going to talk about different varieties of products, cash values, carrier strength, or any nonsense like that. Product and carrier choices always come last. As fiduciaries, our job is to help identify needs, highlight risks, and then implement plans to help avoid unacceptable outcomes. None of this has anything to do with where your broker is employed or what he is looking to sell you prior to even knowing what you need. If someone tries to sell you on a specific product or carrier without doing a proper needs analysis and then comparing options from multiple insurers, tell them no and look elsewhere.
On to some examples.
Permanent insurance effectively addresses the need for estate liquidity. Consider large, illiquid estates that might consist of real estate or closely held business interests. If estates are large enough, then death might trigger federal and state transfer/estate taxes potentially forcing families to sell their illiquid assets when they don’t want to. Fireselling large illiquid holdings presents numerous complicated challenges, highlighting the appropriateness of insurance as a solution.
Permanent insurance can also help bridge the gap between fair and equal. Imagine a family business where only one of two (or many) siblings from the younger generation works in the business. The older generation may want to equalize amounts passed to their kids. If the bulk of that wealth is tied up in the business, is it fair to split the business if only one child is actually involved? Permanent insurance can create the liquidity to solve this problem.
Business succession, estate planning, and wealth transfer for high net worth families offer countless examples where permanent insurance is appropriate, if not the best fit. Even when we bring the conversation out of the high net worth universe, we still can identify scenarios when permanent insurance can be an effective solution. For people with defined benefit pension plans, permanent insurance might be a consideration. In the case of a couple relying on a pension in retirement, the risk exists that the pension recipient dies early, long before his/her spouse. The ability to choose a joint and survivor benefit is often available, but that joint benefit might not be as good a choice as a single life benefit, wherein you could use an insurance policy to provide a benefit for the survivor. This is all subject to the particulars of each individual’s circumstances, and is potentially an appropriate place to consider permanent insurance.
Managing the cost of long term care can also be accomplished using permanent life insurance. Without going into the disaster that is the long term care insurance market, life insurance is now an appropriate way for people to insure some of the potential cost of long term care. The need to pay for long term care is a high probability, high impact event. Life insurance with a long term care feature is a cost effective way to address the risk.
Finally, permanent insurance can be appropriate for the family that simply wants to make sure they pass their wealth to future generations. Wherein legacy is a priority, it can be helpful to simplify the overall asset allocation discussion and separate pools of assets between core capital and generational capital. Core capital is the money a family needs to satisfy a lifetime of spending needs. Generational capital is part of or all of what remains that they wish to pass. Given that those two pots of money have different goals, they necessarily have different risk profiles. For generational money, insurance is, at a minimum, part of the discussion.
There are myriad scenarios that I have left out. The common thread among what I’ve mentioned brings us back to one of the salient points in any conversation about insurance. If there will be a financial impact on a family or business due to someone’s death, then insurance is a way to help manage that risk. Sometimes, those risks last a lifetime.
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