Five key factors for success when using permanent life insurance

Choose a Section Insurance January 03, 2023 5 min read Source/Disclosures Published by: Source: Disclosures: Bhatia and Mandell report no relevant financial disclosures. ADD TOPIC TO EMAIL ALERTS Receive an email when new articles are posted on Please provide your email address to receive an email when new articles […]

January 03, 2023

5 min read



Bhatia and Mandell report no relevant financial disclosures.

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In other articles for Residency for Retirement, we have explained that permanent life insurance, also called cash value life insurance, has tremendous tax, wealth accumulation, asset protection and estate planning benefits.

Based on our experience working with insurance products and physicians for more than 25 years, David, with Dr. Bhatia’s help, outlines five success factors in this article to follow in the implementation of a permanent life insurance policy.

Source: Sanjeev Bhatia, MD, and David B. Mandell, JD, MBA

Long-term time horizon

Whether a permanent life policy is designed to accumulate significant cash values for the policyowner’s retirement, for an executive’s buyout or for any other purpose, it is important that the purchaser have a relatively long-time horizon of 15 years or more. Of course, if the policy is designed for estate planning, the time horizon may be 30 years or more, depending on the age of the insured.

Sanjeev Bhatia

Sanjeev Bhatia

David B. Mandell

David B. Mandell

The reason a long-time horizon is important relates to the fact that most cash value life policies frontload expenses, including agent commissions. To better understand this, consider an A share mutual fund where the sales load is charged up front and there are no ongoing charges compared with a B share fund, for which there is no load upfront, but there is an annual fee. Which of these funds is more cost-effective depends on how long the investor intends to hold the fund: one can calculate a breakeven point before which the B share is best and after which the A share is best.

One can think of permanent life insurance as being generally like the A share mutual fund example. Rather than a sales load in a fund, many life policies have a surrender charge that is imposed if you surrender the policy in full. Importantly, however, the surrender charge does not apply if you access only a portion of the cash value.

The amount of the surrender charge covers many of the insurance company’s upfront expenses, including the agent commission, and the surrender charge goes down over time. The surrender charge in many policies hits zero between 8 and 15 years after purchase of the policy. If you keep the policy in force beyond the surrender period, you have effectively amortized the upfront costs over time and will not be penalized if you surrender the policy.

Taxes are another important reason to keep these policies in place for a long time. This is especially true for people who use these policies for future retirement income because the tax benefits afforded by a policy — tax-free growth within the policy and tax-free access through basis withdrawals and policy loans — gain value as the policy growth compounds over time. As with a Roth IRA, simple math dictates that the longer one can enjoy tax-free growth and access, the better.

Proper design of policy up front

From the outset, the insurance agent should design the policy to meet the client’s plans. To do so, the agent must understand why the client is purchasing the policy, determining whether it is for death benefit proceeds to protect the family, to pay off a business debt or is part of a retirement income strategy. Once the agent understands the objective for the policy, he or she can design it properly from the beginning.

When designing for the death benefit feature, the agent will look to maximize the policy death benefits for any level of premium. The agent may use guarantees and rely on conservative assumptions in the death benefit modeling.

When designing a policy for cash value accumulation, on the other hand, the agent should minimize death benefits for any level of premium, within tax rules, because lower death benefits mean lower cost-of-insurance charges. Also, the policy can be planned to reduce death benefits over time, within tax rules, and should be designed to do this from the outset.

Designed for flexibility

The long-term nature of permanent insurance subjects it to the risk that things change for the owner, for the investments within the policy, with tax laws and with insurance carriers. Best practices for an insurance advisor, therefore, is to design a flexible policy. Flexibility can be built in to the policy in several ways, including the options to change investments within the policy, increase or decrease the premium, modify premium frequency, adjust the death benefit, and add or remove a beneficiary. The more flexibility the policy is designed to allow, the more options the owner has available to fine tune how the policy works within the owner’s overall financial plan as circumstances change over time.

This built-in flexibility, along with the ability under the tax code (section 1035) to exchange policies free of tax, is a powerful remedy to concerns about the long-term nature of the asset class.

Regular reviews, maintenance

In one way, permanent life insurance is like any other asset class in which you might invest: regular performance reviews are mandatory. Just as you review your investment performance with your investment advisor quarterly or annually, so should you review your life policy with your insurance agent. It is during these reviews when you can make decisions on a myriad of options within the policy, taking advantage of the flexibility mentioned earlier. Whether this means changing investments within the policy, paying a higher or lower premium, changing premium frequency, adjusting the death benefit, adding or removing a beneficiary or even exchanging the policy for a different type, regular reviews are the time when the agent and policyowner bring issues to light and make decisions accordingly. Permanent life insurance is not a set-it-and-forget-it asset. Few valuable assets are.

Sophisticated, ethical insurance agent

The most important of the five success factors for using a permanent life insurance policy may be working with an ethical insurance agent who understands the plethora of products in the market, as well as the details of the specific type of policy you might use. If you work with such an agent, they will make sure the other four success factors are in place. If you do not work with such an agent, the absence of any of the success factors could undermine the policy’s performance and how you evaluate the use of the asset class in your planning.

When looking for a life insurance agent, it is important, in our view, to work with an agent who is not operating under a captive or quasicaptive arrangement, which is an arrangement where the agent can only sell one company’s products or is highly incentivized to do so. Rather, someone who seeks an insurance advisor should seek one who is truly independent, with no restrictions on the policies they can provide and with no overhead payment incentives to prioritize one company’s products over another. Beyond that, the agent should have significant experience with permanent life insurance policies along with overall expertise in the insurance marketplace, so they understand what could go awry and can build in flexibility to avoid such situations. Finally, it is always a good idea to work with professionals who are well regarded in the industry and have numerous references to provide.

Permanent life insurance, also called cash value life insurance, has tremendous tax, wealth accumulation, asset protection and estate planning benefits. However, like any sophisticated financial strategy, there are important success factors to consider when choosing and implementing a permanent life insurance policy.


Wealth Planning for the Modern Physician and Wealth Management Made Simple are available free in print or by ebook download by texting HEALIO to 844-418-1212 or at Enter code HEALIO at checkout.

For more information:

Sanjeev Bhatia, MD, is an orthopedic sports medicine surgeon practicing at Northwestern Medicine in Warrenville, Illinois. He can be reached at [email protected] or @DrBhatiaOrtho.

David B. Mandell, JD, MBA, is an attorney and founder of the wealth management firm OJM Group He can be reached at 877-656-4362 or [email protected]. You should seek professional tax and legal advice before implementing any strategy discussed herein.

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