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Life Insurance Policies and Retirement

If you’ve met with a financial planner lately, you may have been told to purchase a whole life insurance policy – the kind of policy that grows cash values. These types of policies can have a place in your retirement plan, but you need to be careful just how you utilize them. Here is a list of pros and cons to their use in your plan.

Life Insurance for Retirement: The Pros

  1. When you have a life insurance policy that accumulates cash values, you can take tax free loans from the cash values during retirement.
  2. A life insurance death benefit can help your spouse accumulate enough funds to retire even after your death reduces his or her household income and pension benefits.
  3. Variable or indexed policies can offer growth that mimics that of the stock market and individual equities.

Life Insurance for Retirement: The Cons

  1. Life insurance cannot be held in an IRA, so you cannot get a tax deduction for contributions.
  2. Life insurance premiums are restricted in order to avoid tax triggers.
  3. Life insurance policies may not accumulate values as aggressively or as conservatively as other types of investments.
  4. Life insurance policies that accrue cash value can be expensive, which reduces the rate of return.
  5. Loans taken from cash values will reduce your death benefit and can adversely affect your heirs.

In general, life insurance policies should be purchased for use as life insurance – not as a retirement benefit. While it’s important to keep their advantages in retirement in mind, those should not be your sole reasons for buying a policy. Instead, keep your capital working for you in a proper retirement account with investments suited to your risk tolerance.

September 6, 2010

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