How to Use Life Insurance in Your Retirement Planning
May 20, 2021 at 11:00 PM
At the beach after learning how to use life insurance in their retirement planning.

If anything, it can appear that your life insurance premiums are limiting your contributions to your retirement fund. With the way many people handle the two, it can certainly be that way.

But, with smart planning, your life insurance policy can help you with creating security for yourself in your later years. Should anything happen, you know your family’s taken care of. And you’ll also know that you have the funds to provide for yourself long into your retirement.

This is how to use life insurance in your retirement planning:

Opting for a term policy

The appropriate way to build toward retirement depends on your financial situation. And this also affects whether a term or whole life policy is best for you.

A term policy can cost as little as 10% of a whole life policy that offers a death benefit of the same amount.

However, this also depends on other factors that influence your premiums. These include your lifestyle habits, general state of health, and family medical history.

If you get an affordable term policy for 20 or 30 years, you can divert the difference from a whole life policy into your retirement plan. That can be in the form of an IRA, annuities, or other investments you’re making.

As I’ve explained in discussions about short and long-term investing, this is an effective way to balance high-security and high-yield options.

Hedging risk

Although there may appear to be some risk with this plan, it’s mitigated by the fact that you can easily renew your plan after the term closes.

And you can convert it to permanent coverage. At that point, your premiums will be going up significantly anyway because of age. If, unfortunately, you develop health conditions, that will also drive them higher. In any case, you’d have used the window of affordable term life insurance to beef up your retirement plan.

The bottom line is that the much lower premiums of a term policy give you more options for investing in your retirement.

But you’ll need to consider the rates you can reasonably get based on factors that underwriters consider. Similarly, you’ll have to think about whether your specific retirement planning strategy benefits that much from the exact amounts you’ll now have available.

Using whole-life insurance

Whole life insurance has vastly different benefits for retirement planning. The largest is that it has a savings component, which you may hear agents refer to as its “cash value.”

One benefit of this savings component is that the cash value is tax-advantaged. However, your dependents only get the death benefit and not the value when you pass away, so you’ll probably want to spend it.

You can withdraw the cash value in your retirement as any other source of income, making it a supplement to your pension pot.

Or, you can use the value to make the policy pay for itself, giving you more money to use for retirement planning. You can do this by simply withdrawing some of that cash and using it to pay for the premium.

A third option is withdrawing the cash and using it for your retirement plan. But that makes the most sense if you took out the policy early and it has had enough time to accumulate value.

If you’re a high net-worth individual or one whose wealth is likely to grow considerably, there’s another reason why you might prefer using whole-life insurance as a savings vehicle: You won’t have to pay as much in estate taxes.

Use life insurance in your retirement planning. Achieve financial security for your future and keep loved ones protected

Our mission at Help You Retire is to give you the resources you need for a well-funded retirement that you can look forward to. We are joined in this mission by OWLFI, whose agents are happy to help you with tailored retirement and insurance advice. Feel free to reach out to them to get help today.

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