Life insurance strategies

Life insurance solves several unrelated problems. Confusing them is the source of most disappointment with it.

The problem

Life insurance is sold as one thing and used for many. Income replacement for a young family, liquidity to pay estate costs, funding for a buy sell agreement, key person coverage, and tax advantaged accumulation are distinct objectives requiring distinct structures.

A policy designed for one of those purposes rarely performs well at another. Most dissatisfaction traces back to a mismatch between the objective and the design, not to the product category itself.

Common objectives

Income replacement

Protecting dependents against the loss of earning capacity during working years. Term coverage is frequently the efficient answer.

Estate liquidity

Providing cash to cover settlement costs or taxes so that illiquid assets do not have to be sold under pressure.

Business continuity

Funding a buy sell agreement or protecting against the loss of a key person.

Legacy equalization

Providing value to heirs who will not receive an operating business or a specific property.

Tax advantaged accumulation

Using permanent policy cash value as a supplemental, tax advantaged asset. This requires funding discipline and ongoing management.

Indexed universal life, stated plainly

Indexed universal life is permanent coverage where credited interest is linked to the performance of a market index, subject to caps, participation rates or spreads, with a floor that protects credited interest from index losses.

It is not an investment in an index. Policyholders do not receive dividends. The floor protects credited interest, but policy charges continue regardless, so cash value can still decline in a year with no index credit.

Illustrations are projections. Caps and charges can change within contractual limits. A policy funded inadequately relative to its illustration can underperform materially or, in adverse cases, lapse. Adequate funding and periodic in force review are not optional details, they are the strategy.

Where indexed universal life is often a poor fit

When the primary need is a large death benefit at the lowest current cost.
When funding may be interrupted within the first several years.
When the buyer expects index returns without understanding caps and charges.
When there is no plan for annual in force policy review.
When the purchase is funded by displacing employer retirement plan matching.

Questions to ask about any permanent policy

What does the guaranteed column of this illustration show, not the illustrated column
What happens if I fund this at less than the illustrated premium
What are the current caps and participation rates, and can the company change them
What are the total policy charges in each of the first ten years
What is the surrender value in years one through ten
How will this policy be reviewed each year, and by whom

Key takeaways

Match the structure to the objective before comparing products.
Illustrated values are not guaranteed values.
Permanent policies require ongoing funding discipline and annual review.
Term coverage is often the right answer, and saying so is part of the job.

Important disclosure

This page is general education, not legal, tax or investment advice, and not a recommendation of any specific product. Suitability depends on individual facts, product terms, issuing company strength and current law. Guarantees, where mentioned, are backed solely by the claims paying ability of the issuing insurance company. Consult your own licensed legal and tax professionals before acting.

Last reviewed 2026-08-09 by Tim Parnell.