When analyzing life insurance for our clients, the first question we like to ask is "What is the purpose of the insurance?" Life insurance certainly is an important tool in protecting your family if the unthinkable happens. We recommend life insurance for such purposes of paying off your home, funding college education for your children, funding part or all of your surviving spouse's retirement in the event of your untimely death.
However, many permanent life insurance (e.g. variable universal life) policies are sold as an investment, which in our opinion should be a secondary consideration, in most cases. The way you really "win" is if you die prematurely (before your life expectancy) That is a pretty high price to pay. Insurance companies, as you would expect, price (i.e. your premium) their life insurance so they make a profit and sales people make a commission. The insurance company bases the premium, in part, on your life expectancy. The internal costs of life insurance products can be expensive (2.5% to 4% per year in fees) which materially discounts your investment return potential.
We have seen many life insurance illustrations, provided by life insurance agents, that show a (non-guaranteed) cash value growing in variable life polices leaving large windfalls to the beneficiaries at your death, tax free. If you look a little closer, you will see the problem with many illustrations is the hypothetical rate of return is greater than you should expect to receive from an investment portfolio. For example, we have seen illustrations with returns of 10% or greater. This means (assuming 2.5% to 4% per year in fees) you actually have to get a return, year-after-year, of 12.5% to 14%. You should know that while life insurance proceeds are passed income-tax free to your heirs; they are not necessarily passed estate tax free.
As odd as this sounds, if you don't have a life insurance need for life insurance think twice about buying life insurance. Many times investing what would be life insurance premium dollars into low cost mutual funds would be a more efficient investment option. If you do have a need for life insurance, consider using level term policies, which tend to have lower internal costs, and there is no penalty if you terminate the policy if there is no further need. There are, of course, situations where you would want to consider permanent life insurance, for example: estate tax (especially with illiquid assets, such as a business or real estate), and business continuation (e.g. partnerships).
If you would like help determining what is best in your situation, we are happy to help. We are not licensed to sell insurance, but we can provide an unbiased analysis of your life insurance need. Should you have a need for life insurance we can work with you and your current agent, or we can refer you to a life insurance broker who can place you with life insurance appropriate to your needs.