Is Life Insurance the Answer to Retirement Savings?

If you’re reading this, you are a senior looking for affordable term life or whole life insurance. You’re 55 or over, and are in a different phase of your life. Your children may be grown, you may be thinking of downsizing a home, and you are a few years away from entering into retirement

We believe life insurance is the cornerstone of a good financial plan. We’d be remiss if we didn’t discuss your retirement plans, and how they relate to your life insurance policy. 

A 2018 report by the Federal Reserve found 44% of adults are not on track with retirement savings. Furthermore, 25% of those surveyed have no retirement savings. 

Life Insurance Shouldn’t Fund Retirement

No, not even whole life insurance. 

If an agent has convinced you to use life insurance as a retirement cushion, give us a call. Additionally, if you have looked at whole/cash-balance life insurance policies to help boost your retirement savings, then you should reconsider. 

Most whole or permanent life insurance policies accrue a cash value, allowing you to borrow against the policy/to withdraw cash. Some slick insurance salespeople argue that life insurance is the best way to save for retirement. The argument is largely due to the tax benefits you gain within a whole life policy. 

As you may already know from reading our blog: whole life insurance comes with a tax-free death benefit. This means the money your beneficiaries receive is distributed, tax-free. The same goes for term life insurance.

The loans you choose to take out of the policy are tax-free, and do not need to be paid back. This provides you with a cash source to use for paying for college, or supplementing retirement income.

Whole Life Insurance For Retirement: The Cons

There are quite a few reasons to avoid using life insurance to fund retirement. 

For example: whole life insurance policies are more expensive than term life insurance policies. Most of these fees are front-loaded into the first decade of the policy.

If, for some reason, you were to purchase a whole life insurance policy and became unable to afford the premium payments, the policy will lapse. The cash value will burn up trying to keep the policy alive. 

Whole Life Insurance: Lapse of Premium

Lapse of premium payments can happen for a number of reasons, such as unexpected financial events, health needs or being laid off from your job. In the event that you need to lapse your whole life insurance policy, you will have paid much more than the premiums for a term policy. Additionally, you won’t be able to take advantage of the tax benefits offered through a whole life insurance policy.

(If you have been financially impacted by COVID-19, and are unable to meet your premium payments, give us a call! We would be happy to help you figure out your options.)

It is possible for whole life insurance policies and “tax free loans” to become taxable. This is a problem if you are taking the loan out during financial hardship. This often happens if the policy lapses or expires during the time the policyholder has taken the loan.

Long Term Costs of Whole Life Insurance

Something else to be wary of: if your whole life insurance policy loan – plus interest – is larger than the cash value of the policy, you’ll either have to place more money into the policy, or the insurance company may terminate your policy. In this event, the loan would be taxable.  

Whole life policies were never meant to be heavily used as investment vehicles – especially for something as large as retirement. The savings accrued are much less than they would be if you bought a term life insurance policy and invested the difference. 

Whole Life Insurance Is Not For Seniors

We don’t typically recommend whole life insurance to seniors. We believe there is an affordable term life insurance policy out there for everyone.

You should always sit down and review your needs with a financial planner. This is especially important if you are worried about saving for retirement. A financial advisor will save you the time and money you’d waste seeking out an alternative savings option.  

When To Consider Whole Life

Whole life insurance policies are good options for seniors in some cases, but when it comes to retirement, it is important to be careful how you are using the cash value aspect of your whole life insurance loan.

If you have existing retirement savings, whole life insurance can, occasionally, provide a financial boost. One example is for those who are in a high tax bracket. If you have funded all other available tax-advantaged retirement accounts, you may want to consider permanent life insurance as an added boost.

Additionally, we will always recommend having life insurance for as long as possible, which might mean whole life insurance is a good option for you, especially if you can keep up with the premium payments. 

Whole life insurance is also good for something known as a “legacy enhancement strategy.” This strategy uses the life insurance policy to leverage your IRA earnings. With this strategy, required minimum IRA distributions are diverted to the premiums for a permanent policy. This can add a substantial amount to your retirement planning, or an even larger death benefit for your beneficiaries.

The Bottom Line
You are better off saving for retirement the traditional way, through a 401k or an IRA. You should not use your whole life insurance policy to fund your retirement. This is particularly true if you are a senior.
If you are considering using a life insurance policy for something other than final expense/beneficiary protection, give us a call! Be very careful before entering into any type of investment strategy. Remember: your life insurance policy should work for you and your needs. We can help.