How life insurance can help you save for retirement
Anyone who isn’t on good terms with a wealthy relative understands the value of saving for retirement. And, as we’ve been told countless times by our parents, teachers, and TV experts, that means having a 401(k) through your job, a well-funded IRA, and whatever Social Security benefits we may be able to count on. It could even mean all three for some lucky people.
However, there is another surprising financial option that receives little attention or consideration. And it ought to. Insurance for life.
What about life insurance? What’s your retirement strategy? Aren’t they two distinct concepts? There are several compelling reasons why people should consider both life insurance and retirement plans as long-term investments.
Certain types of life insurance can help you protect your existing savings, while others can help you save more tax-free. Of course, your strategy will be determined by your current assets, income, and retirement objectives.
Begin with the basics. Term life insurance can help you protect what you have.
When it comes to retirement, term life insurance is the most popular type of life insurance available.
To begin with, term life insurance provides a guaranteed death benefit. It provides financial security during the years you’re raising your family while also saving for retirement in the event of an unexpected and untimely death. That means your family won’t have to dip into your retirement funds to make ends meet. It also means that, depending on how far away retirement is, your spouse may be able to continue saving for it. Protection for your family today and in the future.
The second advantage of term life insurance is its low cost. You have enough left over to fund your 401(k) or IRA because you can protect your family’s finances with a small amount out of pocket each month. It may even leave you with enough money to start an emergency fund and cover other unexpected expenses. See how much term life insurance might cost you.
Set money aside for an emergency fund.
Experts advise that every family have an emergency fund of three to six months’ worth of expenses. Having this extra cash on hand can help you avoid using credit cards if you incur an unexpected expense or your income falls. Because avoiding credit card debt and the high interest burden that comes with it is one of the most effective ways to save for retirement and stay on track.
Permanent life insurance can help you boost your retirement savings.
While term life provides lower premiums and the ability to protect your family for a set period of time, permanent life provides better than average retirement savings for two reasons. The most obvious benefit is that permanent coverage never expires. You’re covered as long as the policy is in effect. But, more importantly, permanent life insurance accumulates cash value over time.
Of course, using permanent life insurance to build assets isn’t for everyone, and experts will advise you to first maximize other assets such as an IRA and 401(k). However, if you’ve already done that and still have assets to invest, permanent life insurance provides an opportunity to set aside significant assets for a tax-deferred retirement plan.
Let’s take a look at how it works:
- When you purchase a permanent life insurance policy, whether whole life, universal, variable, or a hybrid, some of your premiums are used to cover the policy, while the rest is invested in a separate account that grows alongside your death benefit. The fact that there is no contribution limit when using life insurance for retirement planning makes this strategy particularly appealing to anyone who is already contributing the maximum to their retirement accounts.
- Consider this. For those under the age of 50, the maximum 401(k) contribution for 2020 is $19,500, with a traditional IRA contribution of only $6,000 available. By including permanent life insurance in your retirement plan, you can increase the amount you can set aside and grow tax-deferred to any amount you want. Furthermore, unlike a 401(k) or an IRA, there are usually no restrictions on how much or when you can withdraw.
- Your heirs will be grateful as well. The death benefit from a permanent life insurance policy is tax-free to your beneficiary. But what about traditional IRAs and 401(k) plans? If you’re not careful, your beneficiary could face a hefty tax bill.
While these are the broad strokes of using permanent life insurance for retirement planning, there are significant differences between whole life and universal life insurance. Let’s look at what creating a life insurance retirement plan could imply.
Whole life is less risky. Is whole life insurance a good retirement investment? Whole life insurance is much more expensive than term life insurance because it is designed to protect you for your entire life. The policy, on the other hand, creates tax-deferred cash value. It’s also a very conservative option, earning a lower interest and dividend return by investing in more stable investments.
Universal life insurance is another important type of permanent coverage that provides more flexibility. While a portion of your premiums is still allocated to the policy and a separate cash account, you have the option of directing where the money is invested to support your retirement fund. While you are taking the same risks as if you were investing directly, this flexibility does provide the opportunity for significant tax-deferred returns. You can also borrow against the cash value once you retire, generating additional income.
You could also think about converting your policy to an annuity. An annuity can provide tax-free, above-average retirement savings once your whole or universal life policy has accumulated a significant cash value. Annuities are insurance company contracts. The company pays you a fixed amount every year for the duration of the contract in exchange for funding the annuity with a large lump sum – in this case, the proceeds from your life insurance policy. With a lifetime annuity, those payments continue until you die, and depending on the terms of the annuity, they may continue to pay benefits to your spouse after you die.
Of course, when you convert a life insurance policy into an annuity, you lose the death benefit. However, an annuity can provide you with a retirement income for the rest of your life. And, of course, not all annuities are created equal. Compare payouts from various companies to find the one with the most generous benefits.
So, while having a retirement savings strategy in place is a good idea, you should also make sure you’ve looked into every possible option. Using life insurance for your retirement funds may provide an extra boost to ensure your long-term success for many people across a wide range of financial circumstances.