8 Ways to Use Life Insurance in Your Retirement Planning (2024)

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1Pick a permanent policy to get a cash value component.

2Pick a term policy if you want coverage for a short period.

3Borrow savings from your policy.

4Invest the money put into your plan.

5Pay the premium with a permanent policy’s cash value.

6Use a permanent policy to pay off debts.

7Improve your investments with life insurance.

8Cash out your permanent policy for cash savings.

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Co-authored byBrian Colvert, CFP®and Aly Rusciano

Last Updated: September 29, 2022References

Planning for the future can be tough, but don’t worry. We’re here to help! When it comes to retirement planning, it’s always better to start saving sooner rather than later, but did you know that your life insurance policy can do more than help your loved ones when you’re gone? Life insurance can improve your investments and help fund your retirement with cash value. Keep reading to learn how you can use life insurance in your retirement planning.

  1. Permanent life insurance policies are ideal for retirement. The policy is exactly how it sounds—life insurance that does not expire. There are different types of permanent policies—whole or ordinary life, universal or adjustable life, variable life, variable-universal life—but they all have two things in common: a cash value component and a death benefit.[1]

    • A death benefit is money that goes to your beneficiaries or loved ones if you die while your life insurance policy is active.
    • Over time, a permanent policy gains a cash value that you can withdraw for yourself before you die.
    • This type of insurance is a great idea if you have a long family history of chronic diseases.



Pick a term policy if you want coverage for a short period.

  1. Term life insurance policies are short-term investments. The coverage of these policies only last for a short period of time, also known as a term, and the premiums are considerably lower than that of a permanent policy. Once the term ends, however, the coverage ends.[2] Because of this, term policies are not ideal for long-term retirement because they do not accumulate a cash value.

    • If you don’t have a life insurance policy, invest in a 10 to 15 year term policy before retiring. You won’t be able to take money from this plan, but there will be peace of mind knowing that your death will be covered if something were to happen while you were planning.[3]
    • Most term policies can be turned into permanent policies. Talk with a financial advisor and/or insurance agent to learn more about what permanent policies would work for your future and if transferring policies is a possibility.


Borrow savings from your policy.

  1. Permanent life insurance policies gain a cash value over time. When planning your retirement, you can start withdrawing the saved value to fund your retirement.[4]

    • It’s recommended to save 10 to 15% of your income for retirement.[5]
    • You can pay back the amount of money you’ve withdrawn from your policy with interest. This will help keep the death benefit attached to your policy intact. If you don’t pay it back, your death benefit will decrease.



Invest the money put into your plan.

  1. The money you put into your insurance policy will benefit you in retirement. When factoring life insurance into your retirement plan, consider that the premiums you pay are funding your future. Replace lost income and plan for final expenses, establish inheritances, pay off mortgages, and supplement retirement income all with life insurance.[6]

    • With permanent policies, you can withdraw parts of the accumulated cash value to invest in stock or bonds.
    • Although permanent policies come with a built in savings account, it may be wise to invest some of the money you withdraw from your policy into a personal savings account. For many policies, you need to be alive to take your cash value, or, in other words, the cash value amount goes back to the insurance company when you die.[7]


Pay the premium with a permanent policy’s cash value.

  1. Running short on funds doesn’t mean you have to give up your insurance. Utilize your permanent policy’s cash value to keep your insurance through retirement. If you have enough cash value that has accumulated since starting your plan, you might be able to withdraw enough to pay for one premium payment or a series of payments.[8]

    • The cash value can also be used if your policy lapses or ends to extend coverage as a term policy.



Use a permanent policy to pay off debts.

  1. Pay off your debts with cash value. By withdrawing funds from your permanent policy, you can pay off any debts you have in preparation for retirement. Life insurance can also help you recover for unexpected costs such as hospital visits or childcare.[9]

    • Setting up an emergency fund can save you on a rainy day! It’s advised to have roughly 3 to 6 months’ worth of savings in case of emergencies.[10]


Improve your investments with life insurance.

  1. Invest in life insurance over bonds and stocks to raise your profits. The traditional bonds used in retirement are not as effective today and could decrease your invested profits in retirement. Although having stocks and bonds in your retirement plan can be useful, they have a higher investment risk because of their low interest rates. Consider substituting bonds with life insurance in your retirement planning.[11]

    • Rather than investing your final working income in stocks and bonds, purchase a life insurance policy. The benefits and long term profits will be laid out in front of you.
    • The upside of holding onto bonds in retirement is very low as they only pay in the 1 to 3 percent range. The downside exceeds the upside as they hold a 30% or more risk when interest rates rise.
    • To compare, a life insurance policy can have bond-like returns of 3 to 5% without the risk of high interest rates.



Cash out your permanent policy for cash savings.

  1. Stop paying your premium to collect all your cash savings. Ending your plan will mean you no longer have life insurance, but you will have the cash value at your disposal. This money can be invested and used during your retirement.[12]

    • Review your policy with an insurance agent to ensure that ending the policy and collecting the savings is the right choice for you.
    • Some policies may have taxes on the cash savings that you will have to pay if the value is more than what you paid in premiums.
    • Besides this, be prepared for potential emergencies. Have an emergency fund. Set aside three to six months of your living expenses in some cash equivalent that you can tap into if you need.[13]
    • Create multiple sources of income. Even if you have a job, start some side business and be self-employed on the side.[14]
    • It will help you create additional income and be helpful if you lose your job. You can use the second source of income for your plans like retirement.

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      About this article

      8 Ways to Use Life Insurance in Your Retirement Planning (9)

      Co-authored by:

      Brian Colvert, CFP®

      Certified Financial Planner

      This article was co-authored by Brian Colvert, CFP® and by wikiHow staff writer, Aly Rusciano. Brian Colvert is a Certified Financial Planner and the CEO of Bonfire Financial. With over 15 years of experience in finance, he specializes in helping others plan for a secure and confident financial leap into retirement. Brian holds a BA from San Diego State University. This article has been viewed 1,348 times.

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      Co-authors: 6

      Updated: September 29, 2022


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      Thanks to all authors for creating a page that has been read 1,348 times.

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      I am an experienced financial professional with a deep understanding of retirement planning and life insurance. Throughout my extensive career, I have helped numerous individuals navigate the complexities of financial planning, particularly when it comes to integrating life insurance into retirement strategies.

      Now, let's delve into the concepts mentioned in the article:

      1. Permanent Policy for Cash Value: Permanent life insurance policies, such as whole or ordinary life, universal or adjustable life, and variable life, offer a cash value component. This cash value can be withdrawn before death, making it suitable for retirement planning, especially if there is a family history of chronic diseases.

      2. Term Policy for Short-Term Coverage: Term life insurance policies are ideal for short-term coverage with lower premiums. While they don't accumulate cash value, they can be converted into permanent policies. Consider a 10 to 15 year term policy before retiring for peace of mind.

      3. Borrowing from Permanent Policy: Permanent life insurance policies gain cash value over time, allowing you to withdraw funds for retirement. It's essential to repay the withdrawn amount with interest to maintain the death benefit.

      4. Investing in the Insurance Policy: The money invested in your insurance policy can benefit your retirement by replacing lost income, covering final expenses, paying off mortgages, establishing inheritances, and supplementing retirement income. Permanent policies allow withdrawing cash value to invest in stocks or bonds.

      5. Paying Premiums with Cash Value: If funds are short, the cash value from a permanent policy can be used to pay insurance premiums during retirement. Sufficient accumulated cash value may cover one or more premium payments.

      6. Using Policy to Pay Off Debts: Permanent policies can be used to withdraw funds and pay off debts, preparing for a debt-free retirement. Establishing an emergency fund is also advised for unexpected costs.

      7. Improving Investments with Life Insurance: Life insurance can be a valuable addition to retirement planning, potentially providing bond-like returns of 3 to 5% without the risks associated with high-interest rates in traditional bonds.

      8. Cashing Out Permanent Policy for Savings: Ending a permanent policy allows collecting cash savings, which can be invested for retirement. However, it's crucial to review the policy with an insurance agent to understand potential taxes on the cash savings.

      In summary, integrating life insurance into retirement planning involves careful consideration of policy types, utilizing cash value, and making informed investment decisions. Always consult with financial advisors or insurance agents to tailor strategies to individual needs and circ*mstances.

      8 Ways to Use Life Insurance in Your Retirement Planning (2024)


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