When is Permanent Insurance Really Necessary?

For millions of Americans, the choice between term insurance and permanent insurance can be a confusing one. A number of variables factor in to whether one is more appropriate than the other for most consumers, such as debt level, health and longevity, and the size of one's estate. There are a number of arguments on both sides stating why one is better than the other, but in virtually all cases, there are a couple of situations where permanent insurance is usually the best choice.

One situation where permanent, or cash value, insurance may be best is when there is a real chance that the insured or potential insured may become uninsurable in his or her later years due to health conditions. This is particularly true for those with estate tax issues that generally require life insurance to rectify. For example, high net-worth individuals or couples may need to establish life insurance trusts in order to provide needed liquidity and relief from estate taxes. But this strategy is, of course, predicated on the ability of the insured(s) to pass initial underwriting requirements. And this ability can diminish with age for many consumers, who may have family histories of health problems that have surfaced for other members in their later years. Because term insurance requires the insured party to submit to new underwriting requirements at the end of each term, those in this category may no longer qualify for adequate (or even any) protection that may be vitally necessary to preserve the estate.

Another somewhat similar situation involves business buy-sell agreements. These agreements generally require that each partner in a business to purchase life insurance coverage on each of the other partners, so that when one partner dies, the death benefit from the insurance will be sufficient to buy out the deceased partner's share of the business for the surviving owners. But again, it is absolutely necessary that the coverage be in force upon death, which may not be possible with term insurance. Therefore, some form of permanent coverage is generally used for this purpose.