How to evaluate permanent life insurance options

Choosing a life insurance policy gets messy fast. There are many products, many premium structures, and many brands pitching you on benefits that sound good until you try to compare them. On top of that, you have to decide whether term life or a form of permanent life fits your situation. If you are leaning toward permanent life, the complexity goes up another level. The illustrations are dense, the fees vary across companies, and the moving parts make it hard to do an apples to apples comparison. The good news is you can cut through a lot of the noise with one evaluation tool that treats the policy like any other financial project: the internal rate of return.

Before we get into the evaluation method, it helps to ground what permanent life insurance actually is. Unlike term life, which is designed to cover a defined window and then expire if you outlive the period, permanent life does not have a built in end date. In a permanent policy you get two linked components. One is the death benefit paid to your beneficiaries when you pass away. The other is the cash value that builds over time. The cash value can be borrowed against or withdrawn subject to policy rules and tax considerations. That savings feature is part of what makes permanent life more expensive and more complicated than term, but it is also why people consider it when they want lifelong coverage with a balance sheet component.

There are two main flavors of permanent life on the market, and understanding the difference keeps the rest of this conversation clean. Whole life typically offers a guaranteed cash value schedule backed by the insurer. That means the savings portion grows according to a fixed formula set in the contract, with possible dividends depending on the company. Universal life ties part of the outcome to market or crediting performance, so the cash value can move up or down relative to an assumed rate. Universal also tends to let you adjust premium timing and amounts within certain limits, which adds flexibility but also adds risk if returns fall short or charges increase. With both types, the death benefit is the anchor, and with both types you must keep premiums funded. If you do not, you risk losing coverage.

So how do you compare policies in a way that is objective rather than vibes based. Most buyers focus on premiums and the death benefit. That is a start, but those numbers by themselves do not tell you whether one policy gives you more value per dollar. A cleaner way is to treat the policy like any other project and compute the internal rate of return on the death benefit. In plain English, the IRR is the interest rate that makes the present value of what you pay in equal the present value of what your beneficiaries get out. If two policies have the same premiums, the one with the higher IRR on the death benefit is usually the better financial outcome for your family, all else equal. If two policies have the same IRR but one costs less, that one is more efficient.

This is where a reality check helps. Life insurance IRR looks wild in the early years because the payoff is large compared to the premiums paid to date. If you paid one monthly premium and died unexpectedly, your heirs would receive the full lump sum. That produces an early year IRR that can look sky high on paper. Over time, as cumulative premiums stack up and the probability of payout rises with age, the IRR settles down. You should expect the curve to be very high early and to decline as the policy seasons. That pattern is not a red flag. It is the math of risk pooling and timing.

To make real comparisons, do not guess at IRR. Ask the insurer or broker for the optional IRR report on the death benefit. Many illustration systems can produce it even if it is not included by default. You want the projected IRR at different policy durations so you can see how value evolves at year 10, year 20, and at the maturity age. If you are comparing universal life across different assumed crediting rates, you want the IRR under identical assumptions rather than one company showing you a rosy rate that another company refuses to illustrate. Matching assumptions is the only way to get a fair read.

Death benefit sizing is the next practical question. The right amount depends on your income, debts, and the needs you want to fund for your beneficiaries. Think mortgage balance, years of living expenses, education plans, and any bequests. A quick rule of thumb often cited is a multiple of annual salary, with four to five times income used as a simple starting point for discussion. Rules of thumb are not a substitute for planning, but they can help you avoid underinsuring by accident. Another structural choice is whether the benefit should be paid at the first death, the second death, or in both scenarios if you are planning as a couple. Survivorship policies that insure two lives can sometimes deliver a lower premium and a higher IRR than two separate individual policies when the intent is to transfer wealth to heirs or a trust after the second death. If the goal is to protect cash flow for a spouse at the first death, an individual policy can make more sense. The point is to match the benefit timing to the need.

Your age and your health profile matter more than any rider when it comes to pricing. Younger applicants usually pay less because the insurer expects a longer time horizon before paying a claim. Pre existing conditions, smoking, and family history can raise premiums or change your underwriting class. Every insurer has a slightly different appetite for different risks. An independent broker who works with multiple carriers can surface the ones that are friendlier toward your specific health facts. That is not gaming the system. It is matching your file to a carrier that prices fairly for your profile.

Company strength is not a marketing line. You want an insurer with strong financial ratings and stable capital so that the promises in your contract are backed by real balance sheet power. If an insurer is financially weak, there is a risk that dividends underperform or non guaranteed elements get adjusted conservatively. State guaranty associations exist, but relying on them is not a strategy. Spend a moment checking ratings from established agencies and ask how long the product chassis you are considering has been on the market. Long shelf life is not a guarantee of future results, but it reduces the odds that you are buying into an experiment.

You also need to decide who bears more risk. In a policy with a no lapse guarantee, the insurer commits to keep your coverage in force until a defined age as long as you pay the stated premium exactly as scheduled. These designs usually build little to no cash value. They are built to deliver a death benefit on rails. If certainty is your priority, this can be a strong fit. On the other end, non guaranteed policies share risk between you and the insurer. The premiums shown are based in part on an assumed rate of return or crediting rate. If the assumed return is achieved, the illustrated premium and cash value track the projection. If the return is not achieved or if policy charges are adjusted within contract limits, you may need to pay more than you planned to keep the benefit on target. That is not a gotcha. It is the trade off for flexibility and the possibility of better long term value if experience is favorable. Just go in with eyes open.

Now for the practical part. You need illustrations that are comparable. Build a short list of carriers and request full illustrations under aligned conditions. Ask for a level death benefit or a level premium structure that runs to the same age across all illustrations. Pick a payment mode and keep it the same across quotes. If you are reviewing universal life, set the same assumed crediting rate wherever the system allows. Exclude riders that add cost unless you are certain you need them. Most importantly, include the IRR report on the death benefit so you can map value by year. When the set lands in your inbox, read them side by side rather than one at a time. You are looking for consistent inputs and clean outputs.

At this point, loop back to your goals. Decide whether you want a guaranteed or a non guaranteed death benefit and why. If you want the strongest possible certainty that a defined amount will be paid at a defined minimum premium, the guaranteed path is clear. If you value flexibility and the potential for higher long term value, a non guaranteed design may fit better, provided you can tolerate some variability and you are willing to review the policy periodically. Once you know which camp you are in, review the financial ratings of the insurers in that camp, then look at the IRR lines and the premium schedule. The policy that shows the highest IRR on the death benefit at a reasonable cost usually represents the better trade for your beneficiaries when everything else is equal.

There are a few details that get missed in the sales conversation but make a big difference. One is the timing and reliability of premium payments. Late or skipped payments can jeopardize guarantees or cause a non guaranteed policy to underperform the illustration. Set up the payment method that you are most likely to maintain without fail. Another is policy loans and withdrawals. Yes, cash value gives you options, but loan interest and withdrawals can reduce the death benefit if not managed carefully. If your primary goal is pure protection for heirs, do not plan on heavy cash value use unless you understand the knock on effects. If you plan to access cash value later, build that into the design and monitor the policy so that loans do not spiral.

One more point about IRR. It is a powerful comparison tool, but it is not the only lens. A policy with a slightly lower IRR but a stronger guarantee structure might be a better fit for someone who values certainty above all else. A policy with a higher IRR in years 30 to 40 may be irrelevant if your estate plan is built around an earlier transfer or if you expect to change coverage at retirement. Tie the IRR curve to your timeline. That way the number you optimize for actually matches the years that matter to you.

If you are wondering how to kick this off without getting buried in jargon, there is a simple sequence. Work with an independent broker who can pre screen underwriting with multiple carriers based on your health profile. Ask for aligned illustrations that meet the conditions we talked about, including the IRR report. Read the financial ratings. Decide on guaranteed versus non guaranteed benefit. Then compare IRR and premium schedules under those constraints. By the time you reach the application, you will already know how you want the policy to function and what trade offs you are making.

There is a natural next step once you make a selection. You submit an application and go through underwriting. The offer you receive may come back at a different risk class than expected. That is normal. Health files are specific, and underwriters can rate them differently. If the offer is less favorable than what the illustration assumed, your broker can shop the case to another carrier for a second view. This is another moment where independence pays off. You are not locked into one company’s perspective until you accept and pay for the policy.

So what is the bottom line if you want a single principle to carry into every meeting. Assuming premiums, death benefits, and company quality are comparable, the policy that shows the highest IRR on the death benefit over the time horizon that matters to you is generally the better choice for value delivered to your beneficiaries. That principle does not remove the need for judgment, but it does anchor the decision in math rather than marketing.

If this all still feels heavy, that is because permanent life insurance mixes protection with a savings engine, and that combination always takes a bit more thinking than a simple term policy. The payoff for doing the work is that you end up with coverage that fits your life rather than a product that fits a brochure. Ask for the IRR. Align the assumptions. Match the benefit to your goals. Choose a strong carrier. Fund it on time. Check in every so often. That is how you keep the promise you are buying today intact for the people you want to take care of tomorrow.