When does permanent life insurance make sense?

“Buy term and invest the difference.”

The same mantra has been repeated by pundits, experts, and personal finance aficionados everywhere for decades. And they’re onto something. For most people, term life insurance is a great deal.

The average person’s life insurance needs go down over time. At 30 years old, somebody might have a mortgage, a spouse who doesn’t make much, and a couple of young kids. All of these are needs that must be insured against.

At 50 years old, many of these risks are either minimized or have gone away completely. The mortgage is either paid off or close to it. The kids are grown up. And the spouse now has time to dedicate to a full-time career. With these life insurance needs reduced, an expiring term life insurance policy can be reevaluated.

There are plenty of examples of where permanent life insurance is a better choice, however. Here are a few different scenarios:

Upcoming tax liabilities

The beautiful part of life insurance is it passes to heirs tax free. Nobody has to worry about taxes, which can be an additional stress during a tough time.

Permanent life insurance can be especially useful when planning for estate purposes. Say you have a cottage by the lake you’d like to pass onto someone in the family. It was originally purchased for $200,000 and is now worth $700,000. The estate is looking at a tax bill of approximately $100,000 when the cottage is deemed to be sold – something the heir can’t afford. 

Permanent life insurance can be a solution in such a scenario. By getting a permanent life insurance policy for $100,000 and naming the heir as the beneficiary, the cottage owners can gift enough to take care of the taxes on a cottage sale to the heir. This simplifies the inheritance process.

Borrow against it

Another benefit of permanent life insurance is the ability to borrow against the cash value of the policy. This can come in handy more often than you think.

Say the policy is invested in mutual funds that are down thanks to a market correction. Rather than withdrawing the money directly from the cash value of the account and selling when the market is down, the policyholder can borrow against the insurance policy.

Remember: the insurance part of such a policy is protected from creditors in that situation. They can only go after the cash value of the insurance policy if the loan isn’t paid off.

Leaving a legacy

Permanent life insurance is an easy way to make sure an heir will have a certain amount of money when you pass away.

Say you want to leave $500,000 for a child but don’t yet have an estate worth that much. Even though permanent life insurance will cost much more on a monthly basis, it guarantees the child gets $500,000. Term life insurance will do that too, but only until the term expires. After that, you better hope the estate is worth at least $500,000 or consider buying another term policy with much higher premiums.

Permanent life insurance ensures the heir will end up with $500,000 in tax free money, no matter what happens.

Becoming uninsurable

Most people can count on getting life insurance no matter what, albeit at perhaps a high cost.

But that’s not the reality for some people. Often, later in life, people develop various disorders that make them uninsurable. For families with genetic disorders, this can be a particularly touchy subject.

It may make sense in certain scenarios to insure children with permanent life insurance policies to protect their ability to be insured later on.

As you can see, there are many different scenarios when permanent life insurance can make sense. Sure, most people should still buy term life insurance and invest the savings, but for some of us, the decision is a little more complicated.