Life insurance is often perceived primarily as a means to provide financial security to beneficiaries after the policyholder passes away. However, certain types of life insurance policies also offer benefits that can be a valuable part of retirement planning. With so many people struggling to save for retirement and in need of life insurance, these types of policies provide an interesting way to address both at once.
Types of Life Insurance Policies Suited for Retirement Planning
Not all life insurance policies have components that help with retirement. Typically, the ones that are best for retirement are those that are guaranteed throughout a person’s entire life. Term life insurance would not be ideal, because after the term is over, so does the coverage. Instead, you will want to look into:
- Whole Life Insurance – Whole life insurance provides a death benefit and features fixed premiums. It remains in effect for the policyholder’s entire life, as long as premiums are paid. A portion of the premiums paid builds a cash value over time, which grows at a guaranteed rate. Policyholders can borrow against this cash value or even withdraw from it, subject to policy terms. Some whole life policies pay dividends, which can be taken as cash, used to reduce premiums, or reinvested to increase the cash value and death benefit.
- Universal Life Insurance – Universal life insurance offers more flexibility than whole life insurance, allowing policyholders to adjust their premiums and death benefits within certain limits. The cash value of universal life insurance grows based on a credited interest rate, which can sometimes be tied to a market index. This offers potential for higher returns compared to whole life insurance. Policyholders can make withdrawals or take loans against the cash value, but this may reduce the death benefit.
- Variable Life Insurance – Variable life insurance includes an investment component where the cash value can be invested in a range of options, such as stocks, bonds, or mutual funds. While there is a higher risk due to the investment nature, there is also a potential for higher returns, which can significantly increase the cash value. Policyholders have the option to adjust their premiums and death benefits, similar to universal life insurance.
- Indexed Universal Life Insurance – With indexed universal life insurance, the cash value growth is linked to the performance of a market index, like the S&P 500, with protection against market downturns. It offers the flexibility of universal life insurance with the potential for higher cash value growth, depending on market performance.
There are specific forms of life insurance, called “life insurance retirement plans,” that can be especially beneficial. These plans specifically cater to those that want to consider both life insurance and retirement into one.
Considerations for Choosing a Life Insurance Policy for Retirement
The choice between guaranteed growth (whole life) and potential for higher, market-linked returns (variable and indexed universal) depends on the individual’s risk tolerance and investment objectives. Policyholders should consider their anticipated financial needs in retirement, including income sources, lifestyle expectations, and healthcare costs.
The tax treatment of life insurance policies, especially regarding cash value withdrawals and loans, should be understood and factored into retirement planning.
Still, the right life insurance policies, particularly those with a savings or investment component, can provide diverse options for retirement planning. Whole life, universal life, variable life, and indexed universal life insurance each offer unique features that can be tailored to individual retirement goals and financial strategies.