Some people start thinking about retirement in their 20s. Others wait until their 40s or later. Regardless of when you begin planning for a time when you’ll no longer be working full-time, you may encounter questions about retirement and life insurance policies. Namely, is it possible for you to use life insurance as a viable retirement plan?
As you might guess, the answer is more complicated than a simple “yes” or “no” answer. While life insurance can be used as part of a comprehensive retirement strategy, it’s not really meant as a one-stop vehicle to ensure that your retirement years will provide you with a reliable source of supplemental income.
The Connection Between Retirement and Life Insurance
Let’s start by talking about the types of life insurance policies available. The two main versions — and there are plenty of nuances between these, but we’ll generalize for the simplicity’s sake — are whole life and term life insurance. With whole life insurance, you can pay in and get a two-for-one benefit. After a certain amount of time, your premiums will go toward both your death benefit and modest investments. When you reach a specific age, you can withdraw monies from the investment portion without affecting the death benefit.
Term life insurance only has a death benefit component, so there is no savings aspect. You may still be able to withdraw funds that you paid into your policy, but those funds will deplete the amount of your heirs’ benefits when you die. Term life insurance costs much less than whole life insurance, mainly because of its single component structure.
When to Consider Life Insurance as a Retirement Investment Option
As you can see, life insurance isn’t recommended as a primary retirement strategy because of its limited paybacks. Yes, you can get investment monies from a whole life insurance plan, but they are usually very modest. In other words, you should never put all your eggs in the life insurance basket!
With that being said, after you have maxed out on your IRA and 401(k) contributions, you may want to consider the ways a life insurance policy can protect and provide in your later years. It can be quite reasonable as a supplement to a full-fledged retirement plan. Plus, if you own a business or have a family, it can make it easier for your survivors to avoid financial problems after your death.
Obviously, your situation is unique to your lifestyle, risk tolerance and objectives. That’s why it’s important to have a comprehensive discussion with an independent life insurance agent before making your decision. Only then can you be truly certain whether life insurance should be included as a part of your robust retirement portfolio.