Last week I was in a financial planning study group meeting with the topic being about analyzing insurance policies. Within the discussion the story was brought up concerning one insurance agent advising someone to stop making contributions to their 401(k); instead funneling the money into a permanent life insurance policy based on the premise that it made a better investment vehicle. It may be an effective angle for someone to sell a whole or universal life insurance policy, but it rarely makes sense.

Why do they make a lousy investing vehicle? Many permanent insurance policies carry significant costs with high fees and commissions. In the initial years, these costs are amplified as commissions are often front-loaded and if you terminate the policy, there is usually a hefty surrender charge. Then the underlying investing sub-accounts can carry high expenses as well. After taking this into consideration, it’s awful hard to justify the basis to forgo your 401(k) or other tax-advantaged savings vehicle for the investment benefits of an insurance policy. Even investing in index funds within a taxable account would probably be better off in the end.

The gist of the story here is the primary reason that you should buy insurance is based on your protection needs: to allow your family to maintain the same quality of life after you pass away. For many, term insurance is really all that one needs as the financial risk subsides as you get older with assets accumulating, debt subsiding, and the kids are done with college and now live on their own. Permanent insurance can be helpful if you are uncertain of your long-term needs, have family history of questionable health, or want to provide liquidity for your estate planning. All I’m saying is that the decision to buy based on a method of savings should be secondary. It’s the rare individual that would find this to be the optimal savings vehicle for their situation.

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Posted by Jeff Bogue

Jeff Bogue is an independent, fee-only financial planner with his firm, Bogue Asset Management, LLC, based in Wells. He has been a certified financial planner (CFP) practitioner since 1997 and is a registered investment advisor in Maine and Texas. Jeff also writes a personal finance column for National Fisherman magazine.

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