Life insurance is a wonderful tool. Knowing your human capital is protected—so that your loved ones would be financially secure if something happened to you—can provide real peace of mind.

But not all life insurance is created equal.

The incentive structure for many agents often leads them to recommend high-premium, high-commission products—namely, permanent life insurance—over more appropriate and affordable solutions like term insurance. In some cases, life insurance is even pitched as a retirement or investment strategy.

At first glance, it can sound like the best thing since sliced bread. But scratch the surface, and you’ll find serious flaws in the most popular sales pitches. Let’s look at two of the most commonly used ones—and why they often don’t hold up.

1. “Bank on Yourself” / “Be Your Own Bank”

The Pitch

• Overfund a permanent life policy to accumulate significant cash value.
• Borrow against that value “tax-free” via policy loans, often at 4%–6% interest.
• Use the loan proceeds for real estate, college, or other investments—essentially becoming your own source of financing.
• Meanwhile, your cash value keeps compounding as if the loan never happened.
• Pay yourself back with interest, replenishing the value for future use.

The Reality

• You’re not paying yourself back—you’re paying interest to the insurance company. The policy’s cash value acts as collateral, not the source of funds.
• Yes, policy loans are “tax-free”—but so is every loan. The phrase "tax-free loans" reminds me of the phrase "lean muscle mass". All muscle mass is lean! Who has ever taken out a taxable loan??
• Yes, the policy keeps earning dividends with a loan outstanding, but this isn’t unique. Your house can appreciate even with a home equity line of credit. Your investments can grow even if you take a securities based line of credit against your brokerage account. This isn't life insurance magic, it is how collatealrized lending works.
• If you borrow too much and can’t repay it, the policy may lapse, triggering a taxable event on any gains. That “tax-free” loan can come back to bite you with a large tax bill you were not expecting.
• In some years, the dividend crediting rate may fall below the loan interest rate, meaning you’re losing money.

2. “Tax-Free Retirement” and “Guaranteed Returns”

The Pitch

• Don’t risk your retirement in the stock market.
• Avoid building a “tax bomb” by deferring money into your 401(k).
• Instead, use whole life insurance to create guaranteed, tax-free income in retirement.

The Reality

• While life insurance policies often include a guaranteed interest rate, it’s usually quite lower than historical long-term equity returns, and potentially even below inflation.
• Loans are not taxed, but they must be managed carefully. If you die with an unpaid loan, the outstanding balance is deducted from your death benefit. Worse, if the policy lapses, the entire loan amount becomes taxable.
• The “tax-free retirement” only works if the policy performs well, is not overborrowed, and remains in force for life.

Let’s examine a real-world example from a client I began working with after they had already purchased a whole life policy in 2015 at age 47.

A Real Illustration: 30 Years of Premiums, 3.17% Return

In the policy illustration below, the client paid $63,000 per year in premiums, beginning in 2015 (the first 5 years of premiums are excluded from column 5) for approximately $2,738,520 of life insurance. By the end of year 30, they will have contributed $1.89 million.

At that time, Column 6 shows a projected cash surrender value of $3,178,722—but Column 7 shows a guaranteed value of only $1,820,924, which is $70,000 less than what they contributed over the 30 year period.

Even using the more optimistic number, the internal rate of return on $63,000 annually for 30 years to reach $3.18 million is only 3.17%. Using the guaranteed number, it’s actually negative (-0.24%) before inflation or opportunity cost.

In that regard, you could just buy term insurance for the death benefit you want and invest your money more wisely elsewhere.

This was pitched to the client as a guaranteed investment with tax advantages. Well there are no taxes because you aren’t even projected to be ahead until year 12, and no distributions are illustrated. In reality, it performs on par with what you may get in a CD at your local bank from a return perspective.

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So, Who Should Consider Permanent Life Insurance?

Permanent life insurance can make sense in a few strategic, specialized cases:

1. Estate Planning for Liquidity

If your estate includes illiquid assets like a farm or family business and could trigger estate taxes, permanent life insurance can provide tax-free liquidity for heirs.
To keep the benefit out of your estate, you might consider using an Irrevocable Life Insurance Trust (ILIT)—otherwise, the death benefit might be counted in your taxable estate.

2. Special Needs Planning

If you have a dependent with lifelong care needs, a permanent policy can fund a special needs trust, ensuring long-term support without disqualifying them from SSI or Medicaid. The policy guarantees a future benefit that a market-based account may not. The special needs trust would be named as beneficiary of the life insurance, and the trustee could still make distributions for housing, maintenance, medical equipment etc.

3. Business Buy-Sell Agreements

In small business partnerships, permanent policies can fund buy-sell agreements to allow a surviving partner to buy out a deceased partner’s share, keeping the business intact.

Conclusion: Insurance is Insurance, Not Investment

Permanent life insurance can play a role in financial planning, but it’s not a replacement for sound investing. For most individuals, the best course is:

• Buy the right amount of term insurance to protect your family.
• Invest the difference in a diversified portfolio of equities.
• Maintain flexibility, transparency, and control over your financial life.

Don’t fall for the hype—understand the trade-offs and ask better questions before committing to a high-cost, long-term product that may underdeliver.

Meredith Wealth Planning, LLC is a registered investment advisor.  Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities.  Past performance is not indicative of future results.  Investments involve risk and are not guaranteed.  Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed here.