To Use or Not to Use? Funding Your Retirement Plan through Life Insurance

Many people feel the duty of protecting their loved ones and keeping them financially secure in the event of their untimely demise. Parents, spouses and even grandparents consider investing in life insurance, so they can ensure their family’s financial protection no matter what happens in the future.

Many people believe that life insurance and a retirement plan are two different things, and that a life insurance plan is something that is reserved for the family, while a retirement plan is essentially personal. However, financial advisors have proved that life insurance is a great way to shape your retirement plan and enjoy the benefits yourself too.

As a result of the costs that are involved in buying permanent life insurance, most people hesitate to use it for their retirement investments portfolio. If you’re wondering whether this is the right choice for you, it’s a good idea to understand how these policies work.

Benefits of Permanent Life insurance

When you get yourself a permanent life insurance policy, a portion of your premium is settled into another account, which can add to the death benefits you receive. A major advantage that permanent life insurance will give you is that you can borrow or take out money against the cash value you have.

You can use this to pay your mortgage, meet expenses while finding a job in case you lose yours, or any other financial emergency that you might encounter. Another advantage is that all the withdrawals made from the life insurance will be tax free, since your premiums are paid from post-tax income.

What Can Go Wrong?

It’s important to note that when you borrow against the cash value of a plan, you will lower your death benefits unless you pay the borrowed funds back. This is crucial, because if you borrow more than you have surrendered, then the collapse of your policy is inevitable.

People see advantages in using their cash value and funding their retirement plans. However, financial advisors are against this, not only because it is a costly venture, but also because it slows down the performance of the insurance policy itself. Where it could have a 3% annual increase, if you keep withdrawing money, it goes down to 1%.

Investments often do not perform as desired, leaving the policy holder losing the insurance benefits. Once you’ve invested under your life insurance, you will find that it is very expensive. There are also strict surrender charges that come with most policies, making it nearly impossible for you to get out of it.

What Other Options Are There?

While there are plenty of agents who will tell you to take advantage of a permanent life insurance policy, you have to keep in mind that most policies are typically beneficial only for people with a minimum worth of $5 million. So unless you have a lot of money, it’s often better to get traditional life insurance and combine it with your retirement plan.

The risks don’t mean that you should forgo funding your retirement plan with your life insurance. If you are set on using your policy to fuel your retirement plan, then there are a few more things that you should look into. Make sure that you have exhausted all other possible alternatives, including:

• If other retirement vehicles, like your 401 (K) or IRA are maxed out, then it might help you to use insurance to aid your retirement plans. This is even more beneficial if you’re older and have a higher net worth, because then you will be able to reap huge tax savings when you withdraw from your life insurance fund. If you haven’t yet reached your highest peak earnings, then you can get a good deal with the Roth IRA.
• You can also help yourself by fully funding an SEP – IRA plan or a 401(K).
• Starting a pension plan for yourself with a cash balance plan also proves beneficial.
• If you’ve found an insurance policy that you believe is the best, then shop around some more. The one thing you should look for is the quality of the underlying investment, and make sure you understand the fees and expenses expected of you.

With these tips, you can maximize the benefits from both your retirement plan and your life insurance. Make sure you consult an experienced agent who can help you narrow down the best insurance policy for your needs, as well as customize an insurance and retirement plan that takes your current and future goals into account.

Finally, shop around before you make an investment of any kind. Just because your friend or colleague bought a policy that sounds good, does not mean that it’s the best one for you or your family!