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How to Use Life Insurance In Your Retirement Planning

Life insurance is typically seen as a way to provide financial security and leave a legacy for your loved ones. However, it can also play an important role in retirement planning. In addition to providing a death benefit, life insurance can help support your retirement goals by offering the following:

  • Additional protections with policy riders
  • Cash value growth
  • Tax advantages with cash value growth and withdrawals

Learn how you can use life insurance for retirement and the ways a permanent life insurance policy can enhance your long-term financial plan.

Why Life Insurance Should Be a Critical Part of Your Retirement Plan

People commonly use individual retirement accounts (IRAs), 401(k)s, and Social Security benefits as the foundation of a sound retirement plan. Adding life insurance to this can provide additional safety and flexibility.

The primary purpose of life insurance is the death benefit, which pays out to the policy’s beneficiary when the policyholder passes away. The funds are commonly used to cover final expenses, eliminate debts, and leave a financial legacy to heirs. But life insurance policyholders can also use their coverage for living benefits, or features that are accessed while they are still alive. This makes it particularly useful for retirement planning.

For example, permanent life insurance has a cash value component that accumulates over time. The cash value can be accessed through loans or withdrawals during the policyholder’s lifetime, providing a potential source of income in retirement. This combination of living and death benefits makes life insurance a vital tool that can help you meet your long-term financial goals.

Different Ways to Use Your Life Insurance in Retirement Planning

The structure and tax treatment of a permanent life insurance policy can make it a sound addition to a well-rounded retirement plan. Here’s a look at a few key ways to incorporate your policy into your retirement income strategy.

Add Protections With Riders  

Riders are optional coverages added on to a life insurance policy. They address specific concerns that may arise during your retirement years, providing additional protection and flexibility. Some key riders used for life insurance retirement plans include:

  • Long-term care rider: A long-term care rider allows you to access a portion of the death benefit to pay for long-term care expenses. This rider can be valuable if you require extended care due to chronic illness or disability before or during your retirement.
  • Critical illness rider: A critical illness rider provides a lump-sum payment if you’re diagnosed with a critical illness listed in the policy, such as cancer or heart attack. A critical illness rider can help cover unexpected medical costs or lost income due to illness, reducing your need to pull from your retirement funds.
  • Chronic illness rider: A chronic illness rider provides financial support if you become chronically ill and require ongoing medical attention or assistance with daily activities. This rider can help keep you from depleting your retirement funds to pay for care.
  • Waiver of premium rider: With a waiver of premium rider, your premium payments will be waived if you become disabled and are unable to work, keeping your policy in force without further cost to you and your savings.
  • Accelerated death benefit rider: If you’re diagnosed with a terminal illness, the accelerated death benefit rider allows you to access a portion of your death benefit while you’re still alive. This can help ease financial burden when you are no longer working.

Strategically chosen riders can help preserve your retirement funds for their intended purpose, rather than depleting your savings or investment accounts to cover these types of expenses.

Utilize Cash Value

A permanent life insurance policy’s cash value is a built-in savings component. A portion of each premium payment is allocated to the cash value account, where it grows tax-deferred either at a fixed or variable rate, depending on the policy specifics.

Using life insurance for retirement planning typically involves tapping into your cash value to supplement your retirement income. For example, you may use your cash value for income in years when markets are down, allowing you to preserve your investments so they have an opportunity to rebound when the market recovers. These types of strategic withdrawals can reduce the impact of market volatility on your retirement funds.

Your cash value can also be used as an emergency fund, providing cash for unplanned expenses such as home repairs or medical bills so you can avoid liquidating other assets at inopportune times.

Growing Your Cash Value

There are several different types of permanent life insurance policies available, each with a different approach to accumulating cash value. When choosing life insurance for retirement income, consider your tolerance for volatility and risk, as well as how the policy’s accumulation method fits into your overall investment strategy.

Some common options include:

  • Whole life insurance: Whole life insurance offers a consistent, guaranteed growth rate, making it a reliable option for those seeking stability in their retirement plan. However, the growth rate can be slower than some other options.
  • Universal life (UL) insurance: Universal life insurance provides flexible premiums and may have the potential for increased growth depending on market conditions or a specified interest rate.
  • Indexed universal life (IUL) insurance: Indexed universal life insurance ties cash value growth to a market index like the S&P 500. These types of policies typically offer higher growth potential and include safety nets like caps on gains and protection against losses.
  • Variable life insurance: Variable life insurance allows for higher potential growth by investing the cash value in various sub-accounts, similar to mutual funds. However, this option carries more risk due to direct market exposure.

Plan For Tax Advantages On Cash Value

A permanent life insurance policy’s cash value grows on a tax-deferred basis, meaning that you do not owe income taxes on interest, dividends, or capital gains as they accrue. This unique structure allows you to grow your investment without an immediate tax burden, unlike traditional taxable investment accounts that are taxed as they grow.

Withdrawals from the cash value are also tax-free up to the amount you’ve paid in premiums. Policy loans can also typically be taken against the cash value without immediate tax implications, as long as the policy remains in force.

The tax efficiencies offered by permanent insurance policies can help you build up your retirement savings faster and offer extra flexibility in managing your retirement income.

What’s the Best Life Insurance Retirement Plan?  

When combining life insurance and retirement planning, it’s important to understand the key differences between permanent and term life policies.

Permanent insurance policies have a cash value component, offering a significant amount of flexibility. In addition, permanent life insurance policies are, as the name suggests, permanent. This means there are no renewals necessary as long as premiums are paid on time, so there is also no end in coverage even after you retire. However, these policies also have higher premiums than term life policies. Additional fees and expenses built into the policy could also slow down your investment performance.

Term life insurance is a cost-effective alternative that provides coverage for a specific period, typically 10 to 30 years. Rather than purchase a permanent life insurance policy, you may consider buying an affordable term policy and investing the difference in other retirement accounts, such as IRAs or 401(k)s. This could provide you with a life insurance death benefit and lower-cost investment opportunities, which may also have greater growth potential. However, term policies expire and it may be harder and more expensive to renew or seek a new policy during your retirement years.

Ultimately, the decision between term and permanent life depends on a range of factors, including your long-term financial objectives, risk tolerance, and the need for flexibility in your retirement strategy.  If you’re not sure which is right for you, consider consulting with a financial professional or licensed agent or broker.

Other Retirement Pillars to Consider

A robust retirement strategy typically includes several different financial tools. Each plays a unique role in creating a retirement income stream, while also adding elements of flexibility and security. Some common pillars of retirement planning include:

  • 401(k) plans: Offered by many employers, 401(k)s are a popular way to save for retirement. They may have an employer match that can accelerate account growth.
  • Individual retirement accounts (IRAs): Both traditional and Roth IRAs provide tax benefits, making them an essential part of retirement savings.
  • Social Security benefits: A significant source of income for most retirees, Social Security benefits are based on your earnings record and the age at which you start receiving payments.
  • Pension funds: A pension can offer a reliable stream of income based on your salary and years of service.
  • Personal savings and investments: Savings accounts, stocks, bonds, real estate, and other investments can diversify your retirement income and offer flexibility in managing your financial needs.

Putting It All Together

Using life insurance for retirement planning can be a smart move for some investors. It adds an extra layer of protection to your plan while also providing a tax-efficient source of income you can use for a range of retirement needs.

When properly integrated with other retirement pillars like IRAs, 401(k)s, and Social Security, permanent life insurance can add valuable flexibility so you can more easily adjust to life’s uncertainties. In some cases, however, term life insurance is a better choice. If you’re struggling to decide on the right option for your needs, talk to a trusted advisor.

Plan for your family’s future. Get a life insurance quote today.

Get a quote

Plan for your family’s future. Get a life insurance quote today.

Get a quote