Life insurance and retirement planning may not seem to have much in common. You think of life insurance as planning ahead for your beneficiaries, while investing for retirement is planning for your own future. Yet, life insurance can be an important part of retirement planning, some financial advisers say. Consider these points as you weigh the advantages, as well as possible drawbacks, of including life insurance as part of your future retirement investment income.
Cash Benefits of Permanent Insurance
Permanent life insurance plans – variable, universal or whole life – all include a separate account for your premiums to build cash, in addition to the death benefit for your heirs.
As your permanent life insurance policy builds value, you may withdraw cash or borrow against the cash value. You might consider such borrowing if you lose a job and need cash for your mortgage or other monthly bills. Of course, using the cash value of your policy will lower the death benefit for your beneficiaries unless the loan is repaid. And if you borrow more than the surrender value, your policy may lapse. Consider the cash benefit of your policy carefully before making withdrawals.
Possible Tax Advantages
Another benefit of a permanent life insurance policy is a tax advantage as cash accumulates in the policy plan. You can tap this investment interest during your life. And if you adhere to policy guidelines concerning withdrawals and loans, your heirs can receive a tax-free death benefit.
You must proceed with caution, however, to avoid the pitfalls of overusing your insurance policy to supplement your income. Your withdrawals and loan interest can build up to such levels that you must make more premium payments or risk losing the policy. If you borrow too much from your policy, you could risk losing the death benefit for your beneficiaries. Not to mention, you may face a tax bill due on investment gains at ordinary income tax rates, rather than more favorable capital gains rates.
Financial advisers caution if you borrow against your policy and cannot sustain your policy for your entire life, you may be left with a hefty tax bill with no resources to pay it. In addition, if you decide to bail out on the policy early in favor of another type of plan, you may have to pay policy surrender charges. If you have cash value in your policy, ask your agent about taking advantage of the IRS Code Section 1035 to move your cash value or loan to a new policy.
Retirement Planning for Couples
If youre married, having life insurance for both yourself and your spouse can be a solid foundation for retirement planning if your family depends on retirement income. When a spouse passes away in retirement, the surviving spouse may face financial struggles from the loss of a significant portion of retirement income. Life insurance will help fill that gap. It provides the surviving spouse with funds to replace lost Social Security or other income.
The Big Picture
Including life insurance as part of retirement planning does take careful thought. Evaluate your needs for insurance coverage and additional income during your working years, project your retirement income using financial planning tools and talk to your insurance agent and financial advisor before making a decision.