Let's first talk about the overall perception of permanent life insurance. Many consumers feel that permanent life insurance is bad. This perception comes from a variety of sources. Some heard it from a financial celebrity, like Dave Ramsey, a friend or family member, or from personal experience. The truth is, it's not bad or just some money maker for the agent selling it. It just depends what your goals are for it and if it was done properly. Permanent life insurance is meant to last for your whole life, providing some living benefits along with the death benefit. These benefits include cash, a portion of the death benefit in the event of chronic or terminal illness, and money for your family in the event of death.
Permanent life insurance is made up of a few parts. The first is the death benefit, which is it's primary purpose. With many, you can also specify if the death benefit is increasing or level. As a result of the death benefit there is a cost of insurance. With some policies there can be a premium charge that decreases and is usually gone by year ten. There is also a minimum, or target, premium. This specifies the minimum amount of money to be put into the policy to prevent it from lapsing.
When it Doesn't Work?
Many times, an agent will sell a permanent policy to someone with the smallest premium, usually less than the target premium, for the highest death benefit. They will often mention how it builds cash value inside and they can use it whenever they want. The problem with that is if you don't put enough money into the policy, it will eventually lapse. This is the same case whether you were planning on supplementing your retirement income with it or using it to pay off the house at some point. If it's not structured the right way, it won't work.
Another example of when it won't work is if you don't follow the plan. If it was set up as a retirement supplement and you decide to cancel it during year two, you most likely won't get your money back due either to surrender charges or the expenses up front. Life insurance is used for the long term, not the short term.
When Does it Work?
Life insurance works really well when it's funded correctly. This happens when the least amount of death benefit is used in combination with the highest premium possible. This minimizes the cost of insurance and puts most of it toward building the cash. As stated above, it also works when there is a long term plan in place and you don't surrender or take cash out prior to the planned time. When permanent life insurance is setup according to these stipulations it succeeds, and can be used for retirement income, emergency savings, paying off debt, buying a house, buying rental properties. The sky's the limit here.
One example of success with permanent life insurance is J. C. Penney. As you may have guessed, he started and owned the retail store JC Penney. He owned a whole life insurance policy when his business took a dive during the Great Depression, which many other businesses did as well. Instead of declaring bankruptcy and closing his doors because of low sales, he used the cash that was within his life insurance policy to support his business and keep it running. As you can see, it was a good thing he did. His stores are everywhere there's a shopping mall. Similar stories exist for McDonald's and Disneyland.
So really, permanent life insurance isn't bad. It can be quite good and useful. It just depends what your purpose for it is. If you are wanting it to act like an investment, it's not for you. But if you like your money doing more than one thing with the same dollar, consistent and predictable growth (depending on the policy), and protecting your family in the event of your death, it may well be a great option.