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Is Permanent Individual Life Insurance Pass??

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The question in the headline is one that is voiced more and more.

Certainly term insurance has become a favorite of consumers–it is truly being sold now as a commodity. Consumers view it that way, and if they need some, they don’t hesitate to go to the Internet to find it, just as they do for other consumer products.

Term premiums have been driven so low by competition that traditional agents usually can not make a living selling it to “consumers.” Further, the policies are often small in size. The result is that while there certainly is a need for this coverage, the old kitchen table sale has been replaced by the Internet. In view of the cost considerations, this is probably a good thing.

But, in cases where the needs are more complex, permanent insurance is still the best choice in many situations.

For example, second-to-die insurance is basically a permanent product. While term models have surfaced from time to time, those policies do not attract the attention of the agents, perhaps because when the need is permanent, a term product–even if second-to-die–still does not fit the bill.

What would seem to be needed here is a term product with secondary guarantees. Actually, permanent policies with secondary guarantees may not have any cash values at later ages, so, in essence, they may perform as would term policies. There is no substitute for a guarantee that the death benefit will be in force at later ages, and only a permanent product–albeit one looking like term–can do that.

While survivor needs in the short term are ideal for term insurance, a permanent product is still preferred for long term needs such as estate liquidity. In particular situations, the combination of cash values and death benefit is still unmatched. So, permanent insurance is still favored for non-qualified deferred compensation plans, which really function beautifully due to the tax-deferred cash value buildup.

A major reason for the slower permanent sales in recent years appears to be the uncertainty over the estate tax. Even though most professionals believe there will be an estate tax of some sort, the general media sometimes confuses the issue. To be sure, the estate tax was repealed several years ago. But, many discussions have failed to mention that the repeal is effective only for year 2010. After that, the estate tax will be as it was before 2002, meaning many more estates than now will be subject to the estate tax.

Yet, there are still clients who want to defer the life insurance decision, or who disdain the entire estate planning process.

These clients propose a number of rationalizations. Some say it’s because the estate tax has become a political football. Others say they’re confident the tax will be repealed; these people apparently don’t fully appreciate the strong Democratic Party opposition to that possibility.

Others believe the tax will be reduced so much, that they will have sufficient liquidity with their current coverage. They tend to think they solved the problem years ago. Such clients need to be shown that the uncertainties of time must be reckoned with. In fact, that is the very purpose of life insurance–and permanent insurance in particular.

An agent asked me recently if I think most lawyers like life insurance being in the estate plan. I responded unequivocally that estate planning attorneys know that if a client has sufficient life insurance, absent other problems, the estate generally will be easy to administer. Probate lawyers like “easy;” they don’t like problems.

And “problems” can be substantial when life insurance is absent or inadequate. One estate that did not have sufficient insurance had to sell its primary investment asset, a rental property, to pay the estate taxes. Selling the asset was not hard. But the client’s overall plan was altered because there was no longer the rental income that he had thought would be there. Had there been sufficient permanent life insurance, this estate plan would have functioned much better. For whatever reason, he failed to do so, in spite of the sage advice of his agent to the contrary.

Much has been written and said about why people buy life insurance, term or otherwise. Over my 32 years of practicing law, all I can say for sure is that sometimes I can’t figure out for the life of me why clients sometimes do what they do. But surprises happen often enough so that I no longer try to be their psychologist. My job is to discuss pros and cons of solutions that may be offered for the circumstances. After that, if they don’t choose what would appear to be the best choice, well, that is up to them. I have done my job in that case (with a well-documented file, mind you), and so has the agent.

Thankfully, most people will take the advice of a valued insurance advisor and legal counsel. For people with the more complex or long term problems, permanent insurance is still the preferred choice.

Douglas I. Friedman, a partner in the Friedman & Downey, P.C. law firm of Birmingham, Ala., is national counsel on estate and business planning for insurers. His e-mail is [email protected].


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