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How to Use Life Insurance for Retirement

By Edited Nov 13, 2013 0 0

Retirement Income Planning

Retirement income planning has traditionally focused on investment accounts that are tax sheltered. These accounts gained popularity in the 1980s, 1990s, and 2000s. Even during boom and bust cycles in the economy, 401(k) plans, IRAs, and other tax-sheltered retirement plans were favored by investment advisers, since these accounts provided tax-deferred retirement savings for their clients.

However, life insurance is traditionally the financial product used for retirement planning outside of company pension plans. In the 1960s, it was the life insurance policy which rose to prominence in the financial industry as "middle America"'s supplementary source for retirement funds.

Cash value life insurance and endowment contracts allowed ordinary folks to save money for their future while also providing a death benefit to pass along to their child if they died before the savings was fully accumulated.

The process of funding a life insurance policy with the intent of removing funds later for retirement was known as "supplemental life insurance retirement planning."


Process

  1. Decide how much money you can afford to allocate to your life insurance policy. You should choose a dollar amount which you are comfortable with, but which is enough to meet your retirement income goals. A good online financial calculator, should help you determine how much you need to save based on your financial goals, but this amount may not be affordable. That's OK. Save as much as you can and try to increase the amount you save as soon as possible.
  2. Choose the life insurance policy which is best for you. Generally, a limited pay, dividend-paying whole life insurance policy with a premium paying period of no more than 20 years is ideal if you want a whole life policy suitable for retirement planning. This type of policy builds strong cash values, and builds them quickly. Additionally, 100 percent of the dividends paid to this type of whole life policy may be used to increase the cash value. No part of the dividends in these policies are used to pay the premium (a strategy sometimes called "accelerated pay"). A variable universal life or fixed universal life insurance policy is ideal if you want more control over investment options of the policy. While whole life insurance pays a fixed and guaranteed rate of return, universal life and variable universal life offer you the opportunity for fixed interest or variable rate interest based, respectively. The fixed rate on fixed universal life is often higher than the fixed interest rate on whole life and fluctuates with current interest rates. Variable life relies on a basket of mutual funds inside of the policy to produce investment returns. These internal investments may earn you more money than the fixed whole life policy, but you may also make less than the whole life. In fact, you may lose all of your contribution amount if the mutual funds perform poorly enough. 
  3. Contact your insurance broker. Tell him what type of life insurance you want to buy. If you're buying a variable or fixed universal life insurance policy, make sure you insist that the broker schedule the policy to provide "minimum death benefit/maximum cash value." These policies are somewhat flexible in their design and can be scheduled to emphasize death benefit or cash value. Clearly, you want to emphasize cash value for retirement planning
  4. Take out policy loans at retirement. Both policy types allow policy loans at retirement. While this may seem odd, this provision in life insurance gives you tax-free retirement income. The policy loan is normally a low or no interest loan from the insurance company. In fact, universal life and variable universal life often advertises this as a major competitive advantage to the policy when used for retirement.

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