By Dr. James M. Dahle, WCI Founder

Lots of people think I hate permanent life insurance (whole life, variable life, universal life, etc.) and spend most of my time plotting the demise of those who sell it. While it is true that I think permanent life insurance is dramatically oversold (especially as another “retirement plan” for doctors), there are a few times it can be useful. I am often asked,

“Well, what is permanent life insurance good for?”

and . . .

“You always qualify your statements about whole life insurance with ‘almost everyone' or ‘nearly everyone.' What are the exceptions to your general distaste for it?”

This post is about the exceptions.


Is Permanent Life Insurance a Good Idea?

I hope what I write here is never used to sell these products inappropriately. I expect I will never purchase one of these products (again), and I certainly do not think they are mandatory for any doctor. But they are a reasonable option in some circumstances. Here are situations where it could make sense.


#1 Reducing Estate Tax Where You Don't Want Heirs to Access the Money Until You Die

The first situation is for an investor who expects to have to pay estate tax. Keep in mind that if you don't die with more than $12.92 million ($25.84 million married) [2023], you won't be paying any federal estate tax. That is the vast majority of high-income professionals. However, there are a number of states with an exemption lower than the federal exemption. Massachusetts, for instance, has an exemption of just $1 million. A person dying there with an estate of $5 million wouldn't owe any federal estate tax, but they would owe hundreds of thousands of dollars in state estate tax.

Avoiding that payment can be very useful. The way you avoid it is by reducing the size of your estate. Every dollar that isn't in your estate at death is a dollar that isn't taxed at death.

You can give money to charity and give money to your heirs before you die. But there are limits to how much you can give to each heir ($17,000 per year [2023]), and besides, you might not want them to have it yet due to maturity issues. You can put it into an irrevocable trust. Then, when you die, it's not in your estate and it goes to your heirs according to the terms of the trust. However, trusts have very high tax rates. They reach their top bracket at just $14,451 in taxable income [2023].

Using a permanent life insurance policy, which grows tax-free and provides a tax-free death benefit, can be a great option if you are very healthy and have no dangerous hobbies. You give the money to the trust; the trust buys a life insurance policy on your life; and when you die, your heirs get the money tax-free. The trust can even distribute the money in some way other than one big lump sum if you want (although continuing growth in the trust may be highly taxed, and there are ongoing trust fees, of course.)

Bear in mind that this isn't the same thing as the whole life policy your local Northwestern Mutual salesperson is hawking to you when you're 30 and have $400,000 in student loans and aren't even maxing out your retirement accounts. You're buying life insurance because you want the death benefit, not the cash value. So, you structure the policy to have the highest possible death benefit for the lowest possible premium. In fact, you don't have to use whole life insurance at all. You can use guaranteed universal life if you like. While that death benefit typically doesn't rise over the years like whole life, you can buy a heck of a lot more benefit with the same premium since there is no cash value accumulation (which you don't want anyway). If you're married, you will generally want to use a “second-to-die” policy, which has even lower premiums.

Buying permanent life insurance in an irrevocable trust can lower your estate tax while avoiding giving your heirs money before they can handle it and avoiding any trust income taxes.


#2 Providing Liquidity at Death

This is another estate planning use for permanent life insurance. Some people have very illiquid estates. Imagine a man who owns a family business, a farm, or a particularly expensive piece of property as the most significant portion of his estate. Upon his death, his three kids may have to sell that business, farm, or property to get their inheritance or perhaps even just to pay the estate taxes due. The life insurance money provided by a permanent policy can be used to pay those estate taxes. It can also be used to provide an inheritance for two of the three kids, allowing the third one to keep the business or property. It may also allow the heirs to wait a few years to sell so they don't have to get rid of it at fire sale prices.

There is one other use for super savers. If you will owe estate tax but don't have any significant taxable account with which it can be paid, your estate will have to pay your estate tax out of your IRAs. Pulling a big lump sum out of an IRA all at once triggers lots of income tax, which also will have to be pulled out of the IRA. If you withdraw 25%, 50%, or even 75% of your IRA to pay estate and income taxes, there will be a lot less left in that IRA for your heirs to stretch. Life insurance proceeds can take the place of a taxable account to pay any estate taxes due, keeping the IRA intact to be stretched for the next 10 years. Granted, you have to pay the premiums with something (such as IRA withdrawals), but you can do that with small withdrawals each year—which will probably be taxed at a much lower rate.


#3 Providing for a Disabled Heir When You Will Never Be Financially Independent

Imagine you have a special needs child who will always be dependent on you. Also, you're a crappy saver and investor, meaning your retirement plan is to work until the day you die. Or perhaps you're a decent saver, but you just want to make sure there is a defined amount for you to leave behind to provide for your child. While it is quite likely that you will leave more behind by using typical investments rather than a permanent life insurance policy, having a life insurance policy to provide for the heir in a guaranteed manner may make you feel like you have permission to spend the rest of your money. Again, note that you're buying the life insurance for the death benefit, not for its investment components.

You'll want the highest death benefit for the premiums paid, and you don't really care if it becomes a Modified Endowment Contract (MEC). You could buy the whole thing with one single payment if you wanted. A guaranteed universal policy may also fit the bill.


#4 Key Man Insurance Late in Life

Many businesses are very reliant on a certain person. If that person dies, the business may die. Sometimes, having money instead of that person can solve some problems and keep the business alive until the so-called key man can be replaced. More likely, a lump sum of money provided at the death of a partner will allow their remaining partners to buy out their heirs and maintain control of the business. Term life insurance can often be used for these sorts of needs. However, if the key man or key woman in this business is older, it might be a better deal to just buy a permanent policy. Term life insurance in your 60s, 70s, or 80s is rather expensive—if you can get it at all.


#5 Taking a Single Life Annuity

Occasionally, it may be wiser to take a single life annuity and buy a life insurance policy than to buy a lower-paying joint life annuity. Upon the death of the first spouse, the second spouse uses the death benefit to buy a Single Premium Immediate Annuity (or just takes withdrawals from an investment account) to provide for themself. It's good in theory, but in reality, most people are better off just buying the joint annuity. It's certainly simpler, and you only have to worry about one insurance company's guarantees instead of two.

permanent life insurance exceptions


#6 Combined with a Charitable Trust

If you have an estate tax problem and plan to give some money to charity, have highly appreciated shares of an investment you would like to sell, and still want to maximize how much your heirs get, you could combine a permanent life insurance policy with a charitable trust. For example, you could take the highly appreciated shares and put them in a Charitable Remainder Annuity Trust. You would avoid the capital gains taxes on the asset, get an income tax deduction this year for the remainder portion of the donation, avoid estate taxes on the money since it is out of your estate once it is in the trust, and then use the annuity payments from the trust to buy a life insurance policy in an irrevocable trust for your heirs to replace the money you gave to charity.

The devil is in the details, of course, but it's quite possible that this complicated process enables you to help your favorite charity and still pass more money to your heirs than you could have if you had not given anything to charity. The “free lunch” comes from the taxes avoided.


Note that in the first six reasons listed above that you are buying the insurance because you want the death benefit. You're not looking for an investment or “another retirement account.” The last two reasons below involve using the insurance primarily for its investment/asset protection benefits rather than a death benefit.


#7 Pretending You Are Your Own Bank

Infinite Banking and Bank on Yourself are financial concepts used by life insurance salespeople to sell more policies. They both have rabid proponents who think that saving inside their life insurance policies and then borrowing their own money somehow allows them to avoid the evil banking system. I can't explain the entire concept in just a paragraph or two, but if you're really interested, read this post by me and this one by another unbiased blogger who spent entirely too much time investigating the concept before arriving at the same conclusion I did.

Our conclusions: this wasn't right for us but it wasn't the stupidest thing you could do with your money and it could work out just fine for the right person (who usually has an odd distrust for the banking system and an intense interest in gold as an investment). So, permit me to include this on the list of reasonable uses for permanent life insurance. But again, this isn't the usual whole life insurance product being hawked to you by someone masquerading as a financial advisor.


#8 Super High Earners Wanting Asset Protection

In many states, permanent life insurance provides exceptional asset protection when compared to a taxable account and home equity. If you combine a desire for that asset protection with being in the highest tax bracket both now and in retirement AND you have already maxed out every tax-protected account available to you AND you have a decently sized taxable account, it might make sense to buy a permanent life insurance policy with a small portion of your assets. In this situation, unlike the first six situations above, you are wanting the investment (and asset protection) aspects of the policy, rather than the death benefit. You should also be aware of a few things.

First, there is a very good chance you will be better off investment-wise simply investing in a taxable account. The more you value the asset protection (and assuming your state actually provides it) and the death benefit, the more useful you will find this technique.

Second, when you purchase a policy as an investment, you should do everything you can to increase its investment return. This may mean buying “paid up additions” with whole life (since you pay lower commission on those than the base policy and thus increase returns). It probably also means paying annually, not monthly. If you can't afford to pay your premiums annually, you're probably buying too big of a policy.

It might mean trying to do a little better than you might in a whole life policy (guaranteed returns of 2%, projected returns of 5% over a lifetime.) Policies that might do a little better include index universal life policies and variable universal life policies. However, realize that these are complex financial instruments, and complexity favors the issuer and his salesperson, not the buyer. The key is to keep your insurance costs (and in the case of VUL, the investment costs) as low as possible. Your hope is that over your lifetime, the insurance costs will be lower than the tax costs you would incur investing in a taxable account.

By the way, buying one of these things is like getting married. If you want any kind of decent returns, it is “'til death do you part.” If you're not ready to make that commitment, don't buy it. You can always buy it next year or 10 years from now unless your health goes sour. And in that case, it's not like a taxable account invested in a tax-efficient manner is a bad alternative most of the time. Taxable accounts even have a “tax-free death benefit” that insurance agents hope you don't know about called the step up in basis.


Before buying any permanent life insurance policy, be sure you understand the myths that insurance agents like to use to sell them. If you're one of the rare doctors who fits an exception noted above, then shop wisely, choose the right policy the first time, and stick with it until death. But if you're like most physicians, you can just continue to say “Thanks, but no thanks” when offered a permanent life insurance policy.

Get a life insurance quote here from one of the WCI Vetted Insurance Agents.

What do you think? Am I too soft on insurance agents? Too hard on them? Do you agree that all of these are reasonable uses of permanent life insurance? Why or why not? Did I leave one out? Comment below!

[This updated post was originally published in 2015.]