How to use life insurance in your retirement strategy

When we talk about planning for retirement, most of the focus is on 401(k) and IRAs. And investing in these tax-efficient accounts can indeed be crucial when preparing for your retirement.¹ But what about life insurance? A life insurance policy can be a valuable piece in the retirement planning puzzle and may be worth considering. So, take a minute to learn about:

-Whole life insurance and term life insurance

-How each might fit into your retirement strategy

-The pros and cons of each

-Alternative retirement vehicles

What is life insurance?

Life insurance is an insurance product that pays out a guaranteed sum called a death benefit to beneficiaries when the insured individual passes away.² For the most part, life insurance policies are designed to help protect families and other dependents from financial stress in the absence of the insured individual’s income.

The two most popular types of life insurance are whole life and term life. There are some substantial differences between them, as outlined below.

Types of life insurance: Term life vs. whole life

The two main types of life insurance policies are:

Term life insurance

Term life insurance covers the insured for a specific term (10, 20, and 30 years are the most common). The policy pays out a death benefit to the beneficiaries if the insured passes away during the term. Term coverage is typically the most cost-effective type of policy. However, it only lasts until the end of the selected term and doesn’t accumulate any cash value.

Whole life insurance

A whole life insurance policy is a permanent life insurance policy that covers the insured for life. With permanent insurance, a death benefit is paid out to beneficiaries when the insured passes away, regardless of the timeframe. There are other types of permanent life insurance that function similarly, including universal life and variable universal life.

A whole life policy is typically more expensive than a term life policy. However — in addition to lasting for the insured’s entire lifetime — it also includes a cash value component.³ With a cash value policy, a portion of the premiums accumulate and can grow tax-deferred. After a certain amount of time — which will vary depending on the life insurance company and the specific policy — this cash can be withdrawn while the policyholder is still alive.⁴

How can life insurance be used in your retirement strategy?

Retirement and estate planning strategies involve a lot of moving parts. You need to save for your own living expenses during retirement — but you also want to help ensure that your dependents are financially protected once you pass away. How can a life insurance policy fit into this picture?

Using whole life insurance for retirement strategy

When it comes to retirement, life insurance — including whole life — has two main benefits:

• A death benefit, paid out when the insured passes away

• A cash value component, which builds in value over time and can be used for expenses in retirement

The death benefit can be used to support your beneficiaries after your death. This can be crucial for helping support a spouse or partner, putting kids or grandkids through college, and more.

The cash value component can be used to help grow your assets. A portion of your premium can grow, typically tax-deferred, over time. You can then make withdrawals from the account to help supplement retirement income. You can also take out loans against life insurance to help cover unexpected expenses.

That said, the cash available from a whole life policy will probably not be sufficient to fund your living expenses in retirement. Instead, it is best used to supplement other sources of savings — like your IRA or 401(k).

Pros of whole life insurance for retirement

• Covers you for life

• Provides a death benefit to support your beneficiaries after you pass

• Accumulates cash value in a tax-deferred manner

• Cash value is insulated from volatility (unlike investments like stocks)

• You can withdraw from the cash value to help pay for retirement expenses

Cons of whole life insurance for retirement

• Monthly premiums are higher than term life

• Cash value probably won't be adequate to cover retirement expenses fully

Using term life insurance for retirement strategies

For retirement strategies, term life insurance has two main benefits:

• It provides a death benefit to your dependents should you pass away during the term (10-30 years typically)

• The monthly premiums are lower than whole life, so you may have additional funds to apply to other retirement investments or savings accounts

Again, term life does not have any sort of cash value accumulation — so it cannot be used as a retirement account in and of itself. The key benefit is that by choosing term life rather than whole life, you may be able to save on your premiums and have extra funds to use in other retirement savings vehicles.

Pros of term life insurance for retirement

• Cost-effective monthly premiums

• Provides a death benefit if the insured passes away during the covered period

Cons of term life insurance for retirement

• No cash value component

• Only provides coverage until the end of the term

Alternatives to using life insurance in retirement strategies

Whether or not you want to use it as part of a retirement strategy, life insurance is worthy of close consideration as a way to help protect your dependents should you pass away. However, when it comes to saving for retirement specifically, life insurance policies may or may not be appropriate for you. Either way, here are some alternatives worth considering.

Annuities

Annuities are financial products that provide a guaranteed stream of income in retirement.⁵ When you purchase an annuity—either with a lump sum payment or monthly premiums—your investment will grow on a tax-deferred basis. Then, on a pre-determined date, you’ll start to receive regular income payments. Depending on the terms of the specific annuity, these payments can last for a specific period of time or for your entire life.

Annuities are a popular investment option that can provide a measure of financial confidence and stability in retirement. They may be most appropriate for those who are willing to accept a relatively low rate of return in exchange for the financial confidence that comes with a guaranteed source of income.

Retirement accounts

Retirement accounts — including IRAs and 401(k)’s — are financial accounts that are specifically designed to help you save for retirement. They offer tax benefits to be considered as a key component of your retirement saving strategy.

With retirement accounts, you contribute money in your working years, either through paycheck deductions or direct contributions. You can enjoy tax benefits, including immediate tax advantages (in the case of traditional IRAs and 401(k)s), income tax-free withdrawals in retirement (in the case of a Roth IRA) and tax-deferred growth of your contributions. When you retire, you can start drawing money from your retirement account to pay for living expenses.

If you have a 401(k) through your employer, that can be a great place to start. Check to see if your workplace offers employer matching. If so, your employer may contribute a small amount to match your own contributions each year. If you don’t have a workplace plan — or would like to supplement a workplace plan with an individual account — consider opening an IRA with a financial institution or brokerage.

Guardian can help

The information above should be valuable in helping you to decide whether life insurance may be right for your retirement strategy. However, as you get deeper into the decision and purchasing process, there may be financial issues and questions that require you to consult a financial professional with retirement strategy experience.

If you don’t currently have a financial professional, Guardian can help. A Guardian Financial Professional will listen to your needs, help define your goals, and work with you to better understand the retirement savings process and make the right decisions for your situation. Here’s how to find someone near you: