Blog

Life insurance is an important financial planning tool, but in my experience, it is also frequently oversold. As a fee-only fiduciary and CERTIFIED FINANCIAL PLANNER™ professional, I do not sell insurance or receive compensation from insurance products. Part of my role is helping families evaluate whether the coverage they have—or are considering—actually makes sense within the broader picture of their financial lives.

Too often, permanent life insurance, such as whole life or variable universal life, is recommended before determining whether there is actually a permanent insurance need. The conversation can quickly shift from protecting a family against financial loss to cash value, tax advantages, retirement income, and investment-like projections. You may even hear language about “banking on yourself” or strategies presented as having little downside.

Permanent insurance can serve a legitimate purpose, particularly in certain estate planning, business succession, or lifelong insurance situations. But those needs are often more specific than the marketing around these products suggests.

For many families, term insurance during the years when the financial risk is greatest can accomplish the primary goal: protecting the people who depend on your income. The remaining cash flow can then be directed toward retirement savings, investments, debt reduction, or other financial priorities.

Term Life vs. Permanent Life Insurance

Most life insurance falls into two broad categories.

Term life insurance:

Provides coverage for a specific period, such as 10, 20, or 30 years. If you die while the policy is in force, the death benefit is generally paid to your beneficiaries. Term insurance typically does not accumulate cash value and can provide a relatively large death benefit for a lower initial premium.

Permanent life insurance 

Designed to remain in force for your lifetime if the policy requirements are met. Whole life, universal life, and variable universal life are common examples. These policies may also accumulate cash value and can have additional features, guarantees, expenses, and funding requirements.

Neither type is inherently good or bad. The important question is whether the policy matches the financial problem you are trying to solve.

For many families, the primary need for life insurance is temporary. You may need significant coverage while your children are young, while you still have a mortgage, or while your family depends heavily on your income. Other situations may create a longer-term or permanent insurance need, including certain estate planning, business succession, charitable, or legacy goals.

Three Questions to Ask About Your Coverage

1. Who financially depends on you today?

Start with the reason you own life insurance in the first place. If you died tomorrow, who would be financially affected? Consider things like:

• Income your spouse or family would need to replace
• Mortgage and other debts
• Future education expenses
• Childcare costs
• Business obligations
• Final expenses
• Estate or legacy goals

You may discover that you need more coverage than you currently have. You may also find that a need that existed 10 or 20 years ago has largely disappeared.

2. How long will you need the coverage?

Not every insurance need lasts forever. For example, a family may need substantial income replacement while their children are young but much less once the children are independent and retirement assets have grown.

That is why the length of the need matters just as much as the amount of coverage. If your need is temporary, term insurance may be worth considering. If there is a legitimate lifelong need for the death benefit, permanent coverage may deserve a closer look.

3. Do you understand how your current policy works?

This becomes especially important with permanent policies. If you own whole life, universal life, or another cash-value policy, consider requesting a current in-force illustration from the insurance company.

An in-force illustration can help you understand:

• Current cash value and surrender value
• Premium requirements and funding schedules
• Guaranteed versus non-guaranteed values
• Policy costs and expenses
• How long the policy is projected to remain in force
• What could happen if premiums or underlying assumptions change

The policy you own today may look very different from the illustration you were shown when you originally purchased it.

Signs Your Policy Deserves a Second Look

Owning permanent insurance is not automatically a problem, but there are situations where a deeper review makes sense:

You cannot clearly explain why you own it

If the primary reason is simply that someone told you life insurance was a good place to save money, it may be worth understanding the policy in greater detail and comparing it with other ways to accomplish your goals.

The premium is putting pressure on your cash flow

A policy can provide valuable benefits and still be too expensive relative to your other financial priorities.

The policy is not performing as originally expected

Some policy values are guaranteed while others depend on interest rates, dividends, investment performance, or other assumptions. Understanding the difference is important.

Your life has changed

Children grow up. Mortgages get paid down. Investments grow. Businesses are sold. Estate plans change. A policy that made sense when you purchased it may no longer be necessary—or your need may have changed in a way that requires different coverage.

What If Your Current Policy No Longer Fits?

Do not simply cancel an existing life insurance policy because you decide you would structure things differently today. There can be important consequences.

Before making a change, consider:

• Your current health and insurability
• If you still need coverage, make sure replacement insurance is approved and in force before giving up an existing policy. Your health may have changed since your original policy was issued.

• The policy's tax basis and surrender value 
• Surrendering a cash-value policy can potentially create taxable income if the proceeds exceed your basis in the policy.

• Surrender charges or other policy provisions
• Depending on the contract, exiting a policy may have costs or other consequences.

• Whether the existing policy can simply be adjusted
• Sometimes the best solution is not replacing or surrendering the policy. Changes to the death benefit, premium structure, or other policy features may be available.

• Whether an exchange makes sense
• Certain life insurance policies can potentially be exchanged under Section 1035 of the Internal Revenue Code without immediately recognizing gain, provided the requirements are met. An exchange should be evaluated carefully because the new contract may introduce new costs, surrender periods, or other limitations.

Life Insurance Should Have a Job

Life insurance should solve an identifiable financial problem. You should be able to explain why you own it, how much coverage you need, how long you need it, and what you are paying to accomplish that goal.

If the primary explanation for a policy revolves around tax benefits, cash value, retirement income, or investment returns rather than an actual insurance need, that deserves a closer look.

Sometimes the answer is to keep exactly what you have. Sometimes the policy needs to be adjusted. And sometimes there is a simpler and less expensive way forward. The important part is making that decision based on your financial needs, not on how well the product was sold.