There’s a lot of conflicting opinions when it comes to using life insurance for retirement and honestly this isn’t a surprise. Why? Because everybody is different and while one family may see huge benefits from putting their money in life insurance others may need to prioritize their savings elsewhere. The most important thing about deciding whether to use life insurance as a form of retirement planning is that you understand the available options. Knowing the possibilities and potential benefits will help you determine when and how life insurance can form part of your retirement finances.
Knowing Your Options
Life insurance can be used for retirement planning in a number of ways giving you a selection of options to choose from. To help you understand these options and how they can benefit your retirement planning we asked leading financial experts to discuss the benefits of including life insurance in your retirement plans.
-Take advantage of tax deferred growth
Doug Andrew, author of New York Time’s best-seller Last Chance Millionaire and founder of Live Abundant is a huge proponent of cash value policies, “When I started my career as a financial strategist in 1974, I was a buy-term-invest-the-difference proponent—that is, until 1980 when E.F. Hutton introduced a new take on universal life insurance.” Universal life insurance is a type of whole life insurance. It offers a flexible way to secure life long insurance by giving policyholders the opportunity to adjust coverage throughout the life of the plan. It also includes a savings component, which accrues interest tax-free. It’s this savings aspect that makes universal life insurance a popular choice as a part of retirement planning. Doug Andrew proposes Indexed Universal Life Insurance as the best choice, “I recommend the max-funded, tax-advantaged IUL as a significant part of an overall financial portfolio because when structured and funded correctly, it’s like buy term and invest the difference on steroids.” Indexed universal plans provide a number of benefits for retirement including tax-deferred growth and access to the cash value of the policy at any time. Indexed universal plans can be invested in a number of indices, which means that they accrue interest based on the performance of these indices. This gives the potential for policies to earn high interest rates with the added bonuses that the policy principal is protected from periods of market volatility (your principal amount won’t lose money) and any growth is accrued on a tax-deferred basis.
-Secure easy access to tax-free funds
A key benefit of using cash value plans as part of retirement planning is that the savings aspect of the plan can be used as a source for tax-free loans. Michael Dinich, retirement and tax advisor at Your Money Geek sees life insurance as a key method in providing financial security for people during retirement, “Life insurance can be used to select a more generous pension or social security payout method. Typically, pre-retirees are reluctant to take social security benefits early or a single life/period certain pension payments as doing so will negatively impact the surviving spouse.” He recommends permanent life insurance as a simple solution to income concerns during retirement. By choosing a whole life insurance plan retirees can back up social security payments, “Purchasing cost-effective permanent insurance, especially if done first and at young ages can allow a couple to choose higher payout pension option or tap social security sooner.” This advice is also echoed by Doug Andrew who says, “One of the biggest advantages of an IUL is liquid access to cash value anytime during the life of the policy. If taken out properly in the form of a loan (in accordance with Internal Revenue Code Section 7702), you can enjoy tax-free income for a variety of uses.”
-You don’t need to sacrifice life insurance to build savings for retirement
Author, tax attorney, and CFP Rebecca Walser points out that whole life insurance plans combine the security of life insurance coverage with the added benefit of building a savings account, “With permanent life insurance you're almost getting two benefits in one. You can accumulate wealth with after tax contributions (unlike the 401k) so your distributions are TAX FREE regardless of future tax increases, plus it provides the traditional death benefit of life insurance.” The savings component isn’t an afterthought; in fact permanent life insurance plans can offer very competitive interest rates making them a strong choice over traditional investment options, as Rebecca Walser states, “It's a great way to redefine your retirement savings.”
-Secure funds for long-term care
The subject of long-term care costs can be a concern when it comes to retirement. Long-term care can be incredibly expensive and add significant strain on retirement income. Life insurance offers a number of ways to help alleviate the financial demands of long-term care costs, James Johnson and Wes Fuller of Family Assets suggest that people look into a number of life insurance options as part of retirement planning, “there are four life insurance products you can leverage: combination products, accelerated death benefits, life settlements, and viatical settlements.” Combination products are life insurance plans with long-term care benefits included, “The basic idea behind these combination products is that the care policy benefits will be paid one way or another.” This gives policyholders the security of life insurance and long-term care insurance. Accelerated death benefits are another simple way to add coverage for long-term care as these riders, which can be added to many types of life insurance plans, pay out a death benefit advance if the policyholder is diagnosed with a life shortening illness. The final two suggestions of life settlements and viatical settlements are ways of selling your life insurance plan to gain access to their funds early. You’ll need to meet certain qualifications to sell your plan but again this is a simple way of accessing additional income that can be used to cover long-term care costs.
Life insurance can be a powerful and effective addition to retirement planning whether it’s to add a source of additional income, take advantage of tax free, high interest saving options, or as a way to plan for any long-term care needs. If you’d like to find an affordable life insurance plan to help in your retirement use IntelliQuote’s online quote form to get instant quotes from best-rated insurers, today!