A Framework for Evaluating Permanent Policies

Many people in their 30s-50s have been sold a concept of life insurance as an investment vehicle. Especially in periods of market volatility or rising tax rates, permanent life insurance often resurfaces in financial conversations as an “alternative asset class.” It is presented as tax-advantaged, conservative, and contractually backed by guarantees. In certain circumstances, it can absolutely play a valuable role in a comprehensive plan.

Key point: Life insurance is first and foremost a risk management tool (insurance). Only in specific situations does it make sense to evaluate it primarily as an accumulation vehicle. We’ll cover the key points to consider, and if you need help deciding, we’re always here to help you evaluate your options.

The Need for a Disciplined Framework

Over the years, I have reviewed many permanent policies, some newly proposed, some decades old, and many involving decisions about converting term coverage into permanent insurance. What has become clear is that evaluating these policies requires a disciplined framework. Without one, it is easy to be influenced by attractive illustrations that do not fully reflect the economic trade-offs or long-term realities embedded in the contract.

Clarifying the Purpose of Permanent Insurance

The first step in evaluating permanent insurance is clarifying its purpose. Insurance designed for protection (leverage dollars) solves a very different problem than insurance positioned for accumulation (accumulation of dollars).

As a protection tool, permanent coverage can make sense when there is a clear risk, such as young children or a non-working spouse who relies on income replacement. It can also serve an important role later in life when there is estate liquidity risk, particularly if assets are illiquid or estate taxes may be owed at death. In these cases, the death benefit is the primary objective, and the cash value is secondary.

However, when permanent insurance is presented primarily as an accumulation strategy, the analysis must change. In that context, the policy is often framed as an alternative, tax-deferred growth vehicle, a supplemental retirement income source, or a wealth transfer enhancement tool. If that is the goal, the policy must be evaluated alongside other options such as municipal bonds, taxable brokerage accounts, Roth conversion strategies, or reducing debt.

If there is no longer a meaningful protection need and the policy is justified mainly for growth, the scrutiny should increase. Keep in mind that insurance is still insurance, and it’s important to understand the cost of insurance (COI) and the policy’s internal charges. Permanent policies typically include COI that increases with age, administrative expenses, rider costs, premium loads, and surrender charges. In universal life policies, rising COI can create funding stress if returns underperform. A policy that appears self-sustaining under optimistic assumptions may require additional premiums later if crediting rates decline.

Evaluating Returns: Internal Rate of Return (IRR)

One of the most important metrics in evaluating permanent insurance is the internal rate of return (IRR). Illustrations often show compelling long-term hypothetical projections, but the only way to properly assess them is to calculate the IRR on both the cash value and the death benefit.

In the early years, the IRR is almost always negative due to upfront expenses and commissions. It commonly takes eight to twelve years before the policy reaches break-even. Long-term IRR on cash value often falls in the 3 to 8 percent range, depending on structure and assumptions. While that may be reasonable for conservative capital, it is rarely competitive with equities over long periods.

It is also important to distinguish between guaranteed and non-guaranteed assumptions. Many illustrations rely on crediting rates that may not persist for decades. A small reduction in projected returns can materially impact long-term performance and may even require additional funding to prevent lapse.

Permanent insurance is best compared to high-quality fixed income, particularly for investors in high tax brackets who value tax efficiency. It should not be evaluated as a stock market substitute.

Practical Steps for Evaluation

For this reason, it is essential to request a current in-force illustration, a fully guaranteed illustration, and ideally a stress test scenario that assumes lower crediting rates. A complete breakdown of policy charges should be reviewed. Many policy problems do not arise because insurance is inherently flawed, but because expectations were built on assumptions that were never guaranteed.

Term Conversion Considerations

Term conversion decisions deserve particular attention. When a term policy approaches expiration, policyholders are often offered the option to convert some or all of the coverage into permanent insurance without medical underwriting. This can be valuable, especially if health has declined. However, conversion should not be automatic.

It is important to evaluate minimum funding scenarios, maximum funding within guideline limits, and whether the policy is structured to remain in force through age 100. The death benefit option selected, as well as potential MEC limits, can significantly impact long-term flexibility.

More importantly, the strategic question must be revisited: Is permanent coverage still needed? If children are financially independent and estate tax exposure is minimal, the original purpose of the term policy may no longer exist. Converting simply because the option is available is not a strategy.

When Letting a Policy Lapse Makes Sense

There are also situations where letting a policy lapse is entirely rational. Financial decisions should always be forward-looking. If the original protection need has disappeared, if ongoing premiums strain cash flow, if policy IRR is unattractive relative to alternatives, or if escalating charges create uncertainty, it may be appropriate to exit the policy.

A practical framework can simplify the evaluation process:

• Identify the risk the policy is meant to insure.

• If accumulation-focused, compare projected IRR to low-risk alternatives.

• Distinguish between guaranteed and non-guaranteed assumptions.

• Understand all policy charges over time.

• Ask: If you did not already own this policy, would you buy it today?

Final Thoughts: Align Insurance with Objectives

Permanent insurance can be an effective tool when it aligns with a clearly defined objective within a broader financial plan. It can provide estate liquidity, tax-advantaged legacy transfers, and conservative accumulation in certain circumstances. However, it is not universally appropriate and should not be maintained solely because of sunk costs or emotional attachment.

The objective is not to own insurance. The objective is to solve financial problems efficiently and intentionally. When evaluated through that lens, permanent insurance becomes less about sales narratives and more about disciplined financial planning.