Why Permanent Life Insurance is Not an Investment

There is a constant battle within the financial community between permanent life insurance and term life insurance. Most individuals are best served by inexpensive term life insurance policies that are straightforward: pay a premium, receive a benefit if you die within the specified term. Permanent life insurance, which encompasses whole, universal, and variable products,  is much more complicated and expensive and thus needs more guidance before you sign on the dotted line. You will find financial advisors that get commissioned off of the sale of a permanent life insurance policy intentionally pushing the product hard to earn their commission instead of putting the needs of their client first.

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Is Permanent Life Insurance a Good Investment?

One of the benefits an advisor will tell you about permanent life insurance is it isn’t just insurance — it’s an investment, too! Your permanent life insurance policy is really made up of  two portions: the insurance benefit your family will receive when you die, and an investment portion that supposedly fluctuates in the market based on the investments you select. This is how things get very complicated very quickly. When you are just dealing with insurance, be it car, home, or life, you focus on two things: the benefit you receive and the premium you pay. This keeps prices low and transparent, and your decision is usually easy to make.

When you start factoring in an investment portion with the insurance — and most people don’t understand investing to begin with — it can be easy to be duped by the advisor and the insurance company.

5 Reasons Why It is Not an Investment

Here are 5 reasons permanent life insurance is not really an investment.

Too Much Fine Print

Have you ever sat down to buy something that you thought was a simple transaction, and suddenly there are pages of contracts and fine print to read? Do you dive right in or does a red flag go off in your head?

Permanent life insurance is chock full of fine print about commissions, what happens if you cancel the policy within a certain number of years (answer: you lose almost everything you’ve paid into the policy), and what the company isn’t responsible for. Contrast this with a term life insurance policy that essentially states that you pay a certain premium every month, and if you die during the term, they will pay your estate your policy death benefit amount. Term life insurance is cut and dry; permanent life insurance is a mess.

Lose Money if You Stop Paying

If you opened an investment account at ShareBuilder today, you would be encouraged to set up automatic investments from your checking account into a mutual fund. You might contribute $100 per month to get started. You make it through the first 6 months fine, but something happens in your life and you need to stop making payments. You cut off the automatic payments, but you still own the shares that you purchased over the previous 6 months. Their value is dictated by the share price in the marketplace.

With permanent life insurance, if you stop paying the premiums, you can lose all of the money you have “invested” into the policy. It’s not an investment if you don’t hold an asset or shares.

Policy is Unsellable

Continuing with our above example, if you wanted to sell the shares you purchased over the 6 month period of time to cash out the account, you could sell the shares out on the market. With permanent life insurance, you can’t sell your policy to anyone.

Adjustments Can’t Be Made

Once you sign up for a permanent life insurance policy, it is usually impossible to make changes. You are locked in to the premium and projected rate of return.

This is the opposite of every other type of investment available. If your portfolio is 100% stocks today, and you want to be 50% stocks and 50% bonds tomorrow, you can make adjustments to your account. That’s not possible with permanent life insurance.

No Market Value

Your home can be seen as investment because you can sell it to someone else via the open real estate market. Your stock, bond, ETF, and mutual fund holdings can be seen as investments because you can sell them on the stock exchanges. That’s not possible with a permanent life policy because you don’t hold shares in anything. There is no exchange where the free market determines the value of your insurance. Without a market of some kind, insurance simply can’t be seen as an investment. And with permanent life insurance policies costing many times over the cost of a term life policy, it doesn’t make sense to own one based on it being a potential investment.

Agree or disagree? Please share your thoughts below.

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About the Author

By , on Nov 4, 2011
Kevin Mulligan
Kevin Mulligan is a debt reduction champion with a passion for teaching people how to budget and stay out of debt. He's building a personal finance freelance writing career and has written for RothIRA.com, Discover Bank, and many others.

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Leave Your Comment (10 Comments)

  1. David Lewis says:

    I want to first disclose that I run a company whose primary focus is custom life insurance contracts, so that may make my advice a bit tainted.

    However, I would like to point out that none of these points are true in the way you present them. Sure, the SEC and IRS tell you not to call insurance an investment, but all insurance policies, even term, have an investment function built into the policy – that’s how insurers pay claims (premiums plus investments).

    The cash value of a whole life policy serves the purpose of providing a real equity value, the return being basted on mortgage and income-producing assets, bonds, stocks, precious metals, and other investments. So, whatever you want to call it, that’s what it is.

    RE: the fine print. Term insurance is also loaded with fine print. Read an illustration some time. Yes, you can stop paying premiums at any time, and the net effect is that you will lose your policy. But, I assume you mean the “fine print” on a whole life affects your cash value negatively. It *might*, but compare this to the fine print on a 401(k), mutual fund, or any other investment. You always lose money for cashing in early unless you pay for the front-loaded options. Sometimes, you lose a lot of money on those CDSCs.

    Unsellable shares — This is apples and oranges. The policy has a cash value that’s surrendered for its full value.

    “you lose money if you stop paying the premiums” – not really. I mean, maybe it’s possible, but a lot of insurers will just debit the money from the cash value, keeping the policy in force.

    “adjustments can’t be made” – this depends on the policy. Universal life is very flexible. Blended whole life is also extremely flexible, so you can make changes to the death benefit, premium payments, etc. when you need to.

    “no market value” – irrelevant. It has a guaranteed equity value backed by the insurer’s general investment account, which is market-based. Also, the statement about whole life costing more than term is not necessarily true.

    Whole life is mostly an opaque product, but we can reverse engineer those costs and we find that whole life has net costs comparable to term life over time, depending on product design. The difference is in how those costs are distributed. With term life, your mortality costs are made level thanks to level premium funding (and investment scheme associated with the policy by the insurer) to keep your premiums from rising. The actual mortality costs rise each year, but you never see those increases on a year-to-year basis.

    With whole life, the mortality costs per $1,000 of death benefit rise every year, but the net amount at risk (the amount of insurance you buy) decreases each year. So, while those costs per $1,000 rise, the total costs may flatten out or decline.

    A significant portion of the premium goes to the cash value, which accounts for the higher premiums and, with blended whole life policies, more than 70 or 80 percent of the premium is returned to you as cash value in the first year alone, improving the internal rate of return both in the short and long-term.

    With purely market-based investments (equity investments), you’re relying on CAGR and certain contract assumptions embedded in those mutual funds, ETFs, etc. to provide the liquidity when you need it. You’re also hoping that the market returns a particular amount (rate of return) and that the distribution of those returns is favorable to you (variance in return), which it may not.

    With whole life, at least part of a person’s savings is known in advance, and those guarantees can be changed to favor the individual.

    All an investment is, is an asset that generates income or grows in a reliable and predictable manner. The marketability aspect, fine, print, etc. are all non-essentials. You could easily say that a real estate business is not an investment, or limited partnerships are not investments based on lack of marketability or ability to sell outright, but that’s not true either.

  2. T Thannisch says:

    Unfortunately most people are under informed about products… Should anyone throw all their money into investments, after tax dollars that are taxed every year if it grows? I know everyone loves paying extra taxes.. What if all are money is in investments and you get sued? Yikes! Creditors are going after that! Do all the same things, aggressively or conservatively inside a permanent insurance wrapper and the results are more protected and more beneficial.

    Let’s put 500 dollars a month in investments.. Hope you don’t die in a year and leave a little over 6k for your family.. That could suck.. I would rather leave a million..

    If you are not an expert at something, maybe a financial advisor would be best. Wealth accumulators are doing great things, they are just forgetting a step..

    • Pinyo says:

      I have a million term life policy. My financial advisor friends do the same thing…buy term life. I want to see you buy a $1 million permanent policy and pay for that.

  3. Masaj Craiova says:

    Thanks for posting this. I’ve read a couple of life insurance articles lately but they’ve all been very vague. You were quite clear in your explanation.

  4. Elvis Fuller says:

    It is not an investment; it is insurance. However, some financial heavyweights are saying that times have changed and the stock market has underperformed. They are recommending that their clients have up to 10% of their portfolio in life insurance.

  5. butch ambrosio says:

    Life Insurance is simply a business. It is a contract wherein the insurer promise to pay the insured’s beneficiary(ies) in the event of death of the insured, in exchange for payment, which is called ‘premium’. Understandably, no one is too excited to purchase a policy, which, in most cases, the buyer or owner won’t benefit from it, only his designated beneficiaries.

    There are some products that life insurance elements and investment are combined, although they might not yield significant returns, they are guaranteed and can be enjoyed by the policy owner, as a living benefit. Surprisingly, in this current worldwide financial situation, that old-fashioned way of investing is getting the upper hand. Many investors now joked around that the phrase “buy term and invest the difference” is now “buy term and lose the difference”! Term insurance should be the first priority if only concern is for protection. However, in the long haul, it would become more expensive than the permanent insurance, because you don’t get any cash value in return year after year, compared to permanent, aside from the fact that you will run a risk of insurability as years go by.

    Term and Permanent insurance policies are like renting and acquiring a house. Renting (like term) would be more flexible and less complicated than acquiring a (permanent) house, especially through loans and mortgages, but people tend to acquire properties in every possible way, because they also see it in the long run as an investment. We all know now what happened to homeowners in the U.S. who lost their property due to payment default (aka stop payment). Nobody is insulated from financial distress, so before entering into a contract, be it as a property mortgage or insurance, make sure that you are capable to finance your plans.

    Oh by the way, insurance agents get more commission through permanent policy, because they have more explaining things to do (remember, the fine print?) than the term. But the commission pay is diminishing on the subsequent years, and usually nil after a few years, unlike the term where commission is increasing on the succeeding years, because the premium of the insured is getting higher because of age change. So, towards the end, the level of commission earned by the agent between the contrasting policies will become even in scale.

  6. Jeff Waddington says:

    Kevin, I appreciate your article and I am always open to conversations regarding life insurance. While I agree with the basic premise that life insurance should not be regarded as an investment, I would like to address a few of the statements you made.

    First, the characterization of advisors “intentionally pushing the product hard” in my experience could not be further from the truth. While I’m sure there are some who behave in this manner, in my 20 years in this industry, it is hardly a majority. The vast majority of advisors make every effort to do right by their client – and in some cases, the best option for their client could very well be permanent life insurance.

    Second, for most people, the basic need for life insurance can be met with term life insurance. Permanent coverage is slightly more complex than term and is generally used in business & estate planning situations. I think to call it a “mess” is a mischaracterization. There is as much fine print in a mutual fund prospectus as there is in a life insurance policy.

    Finally, your statement that “adjustments can’t be made” is rarely true. Universal Life is the most popular type of permanent coverage today and it is a flexible premium, adjustable benefit product. If properly structured, people can pay more, skip premiums & reduce the death benefit all within one contract.

    Having been in this industry a long time, I am very passionate about what life insurance can do for families & businesses should the unthinkable happen. As I said, I agree with the basic premise that the goal of life insurance should not be as an investment, but I felt clarification was in order.

    • Pinyo says:

      @Jeff – Thank you for responding in a fair and professional manner. I personally have dealt with both good and bad insurance advisors. You’d be surprised at the length that some would go through to push high commission products. But it is also fair to say that there are good insurance advisors out there (and I do have relatives in the business).

      Thank you for agreeing with the premise of this article, and also for your clarification on the type of adjustments possible with insurance contracts.

  7. Penny says:

    Thanks for posting this. I’ve read a couple of life insurance articles lately but they’ve all been very vague. You were quite clear in your explanation.

  8. Very good article.

    I appreciate the enlightening information about the murky world of permanent life insurance.

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