Can I use a life insurance policy to plan for retirement?
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Asked August 23, 2012
It is important to include life insurance in your retirement plans, but make sure that your policies are working for you. There are programs called Life insurance Retirement Plans which are targeted to high-value customers who have already maxed out other savings vehicles, however, for most people, retirement planning using life insurance may not be the most useful tool.
Term life insurance policies are typically purchased for a specific purpose. Instead of converting or renewing the policies at a higher premium, consider whether the policy is still useful. It could save you money to allow term policies to expire, and use permanent policies for purposes that have no specific duration.
Permanent, or whole life insurance, never expires. Most permanent life policies also have cash values which grow over time, and can be borrowed from by the policy holder. Other types of policies pay dividends. You will need enough coverage to pay off any family obligations and provide for your family, but purchasing more coverage than you need will tie up your retirement finances that could be better used elsewhere. Allowing the cash value to build creates a tax-deferred account that you can borrow against without paying interest or putting up collateral.
If you purchased your life insurance early enough, it will build enough cash value that the policy can be used to pay its own premiums. You will have to avoid withdrawing from the policy value over time, but setting it up to pay for itself in later years will guarantee your coverage when financial times are lean.
Very few life insurance plans are going to provide you with significant income after retirement, and that is not what this type of policy is intended to do. Savings accounts and trust funds may provide you with better retirement benefits, and give you a great deal more control over how your investment is used. On the other hand, a whole life policy purchased in your 20's and allowed to build cash value can produce a supplemental fund for your senior years, or at least reduce your financial obligations.
Answered August 23, 2012 by Anonymous