Should You Use Life Insurance for Retirement Planning?

You might not think about life insurance when you’re planning for retirement, but it can be a valuable tool. It can help protect you or your spouse if one of you were to pass, and it can supplement your retirement income. Here’s how you might use life insurance for retirement planning.

Protecting Your Spouse from Financial Insecurity

One of the primary benefits of using life insurance as a retirement planning tool is the protection it provides your loved ones. If you and your spouse save jointly for retirement and something were to happen to one of you, the surviving spouse may lose out on the savings the other spouse would’ve contributed. Life insurance helps protect from that risk.

For example, assume you and your spouse contribute to an individual retirement account (IRA). If your spouse passes away at age 50, it might amount to 10 or more years of lost savings potential. That could put your retirement in jeopardy, as you wouldn’t have the benefit of your partner’s contributions. A life insurance payout could help replace those lost savings.

This risk is more severe if one spouse is the primary breadwinner. Not only would the surviving spouse be left without income, but a majority of their retirement security would likely be lost as well. Life insurance can be the ideal protection in this situation.

Using Life Insurance for Retirement Income

You can also use life insurance for retirement income by incorporating your policy’s cash value in your distribution plan or taking advantage of specific policy provisions or riders.

Borrowing from Your Cash Value

In addition to providing a death benefit, permanent policies such as whole, universal, or variable life also build cash value. One of the ways you can use this cash value is by taking a loan against it in retirement. You may decide to borrow against your policy if you have unexpected expenses, such as a major home repair or medical costs.

As long as you repay the loan, you typically won’t incur any tax liability. However, although you’re borrowing from yourself, you should still consider your ability to repay. If you fail to repay the loan, your policy may lapse.

Tapping Annuities for Income

Annuities are life insurance products that give you guaranteed income for life. Rather than giving your loved ones a payout after your death like a life insurance policy, annuities insure you against the risk of living longer than you expect.

Much like Social Security or pensions, these can be a key component of your retirement income plan. Because they’re guaranteed to pay for your entire life, you don’t have to worry about running out of money.

However, carefully weigh the potential drawbacks of annuities. They typically don’t grow as much as traditional investments like stocks and mutual funds, and they’re less flexible. Once your payout begins, it’s generally fixed and often doesn’t grow with inflation.

Leveraging the Accelerated Death Benefit

Accelerated death benefit riders allow you to receive an advanced payout of your death benefit if you become chronically or terminally ill. Your policy will specify the exact requirements to trigger the payout, but you generally must have a condition you’re expected to die from within two years.

An accelerated death benefit reduces the payout your beneficiaries collect, but it may allow you to preserve other assets such as investments or property.

Accelerated death benefits generally aren’t taxed. This could make your total retirement plan more tax-efficient by allowing you to pay for care or other expenses without taking larger withdrawals from tax-deferred savings, potentially pushing up your tax rate.

Considering Retirement Savings Accounts and Social Security

Life insurance generally shouldn’t be your main source of income or the central feature of your retirement plan. Instead, consider it as a supplement to your retirement savings accounts like 401(k)s or IRAs and Social Security.

Employer-sponsored plans like 401(k)s are good ways to put money aside. Many employers provide a matching contribution on the money employees contribute, which can boost your savings. IRAs allow you to contribute to tax-advantaged accounts independent of your employer. You also may receive Social Security benefits based on the amount you earned during your working years and the age you choose to begin receiving benefits.

Reach Out for Help with Retirement Planning

After a long and rewarding career, you deserve the retirement you’ve imagined. Thoughtful planning and careful execution can help turn your dreams into reality. If you have questions about using life insurance for retirement, consider contacting a trusted financial professional for assistance.

Insurers and their representatives are not permitted by law to offer tax or legal advice. The general and educational information here supports the sales, marketing or service of insurance policies. Based upon individuals’ particular circumstances and objectives, they should seek specific advice from their own qualified and duly-licensed independent tax or legal advisors.

Colonial Penn is here for you!

Colonial Penn has specialized in making life insurance simple and accessible by offering it directly to consumers since 1957. Click here to learn more.