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

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Co-authored byBrian Colvert, CFP®and Aly Rusciano

Last Updated: September 29, 2022References

Pick a permanent policy to get a cash value component.

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.

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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   • You can pay back the amount of money you’ve withdrawn from your policy with interest.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.

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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]

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.

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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.

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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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