My wife and I are expecting our first child this fall. Like a lot of soon-to-be parents, I have spent the last few months thinking about things I never used to think about -- wills, guardianship, and how much life insurance we actually need.
That process led me down a rabbit hole I want to share, because the life insurance conversation gets complicated fast, and not always in ways that serve the buyer.
Most people buy life insurance the way they buy a smoke detector. They know they need it, they do not think about it much, and they hope they never use it. That instinct is basically right for term insurance. Permanent insurance is a different product, and it gets sold as something it usually is not.
Let me be direct: for most young families looking to build wealth, a whole life or universal life policy is a poor savings vehicle. That does not mean permanent insurance is a bad product. It means it is the right answer to a specific set of problems, and it gets recommended far too often for problems it does not actually solve.
Why the Sales Process Creates a Conflict
The commission structure on permanent insurance is unusually high. First-year commissions on whole life typically run 50% to 110% of the initial premium. On a policy with an $8,000 annual premium, the agent may pocket $4,000 to $8,800 in year one alone. That money comes out before you accumulate meaningful cash value, and it takes years to recover.
This is not a knock on every agent or other financial providers. Many are honest professionals who believe in what they sell. But the incentive structure pulls toward permanent coverage even when term coverage would serve the client better, and that pull is worth understanding before you sit down for a conversation about "financial protection." As a new parent, you are going to have a lot of those conversations. I already have.
The Return Problem
Here is what the conventional wisdom holds, and what most independent analyses support: over a 20-year horizon, term insurance combined with low-cost index fund investing substantially outpaces whole life on a net-of-fees basis. The tax-deferred growth inside a permanent policy sounds attractive until you account for what is eating it.
Mortality and expense charges reduce net returns throughout the policy. Surrender charges can consume all available cash value in year one and do not fully phase out for 10 to 15 years, so an early exit is genuinely painful. Policy loans charge 4% to 8% interest -- against your own money.
Then there is cost-of-insurance escalation, which, along with the complexities of underwriting, does not get explained clearly enough in most sales presentations. In a universal life policy, the mortality charge increases each year as you age and applies to the death benefit minus the cash value. A $1 million policy issued at age 40 might carry COI charges under $1,500 annually at preferred rates. By ages 60 to 65, those charges can climb significantly -- potentially several thousand dollars per year in mortality charges alone, depending on your health class and how the cash value has grown. If the policy was illustrated assuming returns that never materialized, this escalation can cause a policy to implode at exactly the age you counted on it.
For someone my age, shopping for coverage right now, this matters. A policy I buy today will need to perform across 30 to 40 years of changing rates, changing health, and changing costs. The illustration an agent shows me in 2026 is a projection, not a promise.
Two Tax Problems You May Not Know About
The IRS limits how aggressively you can stuff money into a life insurance policy as a tax shelter. If you fund a policy too fast and exceed the 7-pay test threshold under IRC §7702A, it becomes a Modified Endowment Contract. MEC status changes how distributions are taxed: gains come out first as ordinary income rather than basis, and withdrawals before age 59½ carry a 10% additional tax. For a high earner in a combined federal and state bracket of 40% or more, this can cut the after-tax value of a cash value withdrawal nearly in half.
The second problem shows up when a policy lapses. If cash value has been depleted by COI charges or loans and the policy terminates, you may receive a 1099-R for the difference between cumulative distributions (including loans treated as distributions) and your cost basis. The tax bill arrives after the coverage is already gone. Todd has had clients come to him after discovering this during tax season. It is not a conversation anyone wants to have.
Where Permanent Insurance Actually Makes Sense
The above is not a universal indictment. Permanent insurance solves real problems that term cannot touch.
Estate Liquidity
For large taxable estates, it is often the most cost-efficient source of liquidity. The federal estate tax still carries a 40% top rate, and even with the exemption raised to $15 million per individual under the One Big Beautiful Bill Act signed last year, families with significant illiquid assets -- a business, real estate, a concentrated position -- need a way to pay estate taxes without a forced sale. A permanent policy held in an irrevocable life insurance trust keeps proceeds outside the taxable estate and converts annual premiums into tax-free liquidity for heirs.
Special Needs Planning
For families with a disabled child or dependent, permanent insurance is often the best mechanism available. A parent can own a permanent policy and name a special needs trust as beneficiary. When the parent dies, the trust receives tax-free proceeds that can fund supplemental care, housing, and quality-of-life expenses for decades -- without disqualifying the beneficiary from Medicaid or SSI.
This is an area where our lead advisor, Todd Sensing, works with deep personal experience. As the father of two sons with autism, he has built this kind of planning into his own family's financial life and does the same for clients across the country. The combination of permanent insurance and a properly structured trust is not just useful here; it is often irreplaceable. Todd wrote more about how different policy types fund a special needs trust if you want the specifics.
Business Succession and Asset Protection
For business owners with partners, permanent insurance can fund a buy-sell agreement over a 20- to 30-year horizon. Term insurance has a fixed end date that may not align with the actual ownership transition. Permanent coverage does not. And in states like Florida and Texas, life insurance cash values receive unlimited creditor protection, which matters a great deal for physicians, contractors, and others with liability exposure.
The Question to Ask Before You Buy
The right question is not "should I buy permanent insurance?" It is "what specific problem am I solving, and is this the most efficient solution?"
If the answer involves estate liquidity, a special needs trust, a buy-sell agreement, or asset protection from creditors, permanent insurance deserves serious consideration. If the answer is "I want to save more money" or "my agent said it's a tax-advantaged investment," the math almost certainly points elsewhere in your financial planning.
That is the conclusion I came to for my own family. We are buying a 30-year level term policy sized to replace my income and cover our mortgage. It is straightforward, it is affordable, and it solves the actual problem: making sure my wife and our child are financially secure if something happens to me. If our situation changes down the road -- a business, a larger estate, a child with special needs -- we will revisit that decision. But right now, term is the right tool.
Before you sign anything, ask to see a detailed illustration that shows cost-of-insurance escalation over time, the full surrender charge schedule, the impact of policy loan interest on cash value, and the minimum premium needed to keep the policy in force if credited rates come in below projection. If that illustration is not readily available, or if the agent seems reluctant to walk through it line by line, that tells you something important.
The NAIC's Model Regulation #582 requires that illustrations be self-supporting under their stated assumptions. What it cannot require is that every agent explains those assumptions clearly. That part is on you to ask for.
