Should You Add Whole Life Insurance to Your Retirement Plan?
We aren’t being hyperbolic when we say that almost every financial decision you make now could impact your future. This includes the life insurance you choose to protect you and your family.
You may know that certain life insurance options can be useful to fund your retirement. This article provides more detail about whole life insurance policies and why this policy type may not be your best retirement option.
What is a Whole Life Policy?
A whole life insurance policy – also known as a permanent life insurance policy – is a life insurance policy in which a cash value accumulates over time. Occasionally, businesses will offer whole life insurance policies as part of non-qualified retirement plans to keep their key executives happy.
A whole life policy differs from a term life policy in that it is for your entire life, rather than a set number of years. Additionally, the cash value it accrues can be used to help pay for debts or to finance an estate for your children or loved ones.
You can purchase life insurance to replace a family member’s income if they pass away. This is particularly crucial for families with young children or individuals with debt, as their death benefit can have the use to fund their education, eliminate debts, and pay for any additional expenses that may occur.
Should my retirement plan include whole life insurance?
One of the draws life insurance use to attract customers to whole life insurance is the ability for the cash benefit to be used to fund retirement.
Here’s how that works: you – the insured – pay a fixed premium for a set death benefit.
The premiums on whole life insurance policies are typically higher than term life policies, and a portion of these premiums are invested in a cash value account.
The amount in the cash value account increases over time and is guaranteed to do so. For whole life policies, the cash value increases according to a formula set by the life insurance company. As your cash benefit grows, your death benefit decreases.
You can withdraw this cash benefit or you can use it to pay off the rest of the policy.
This cash benefit is tax-deferred and you can borrow from it at any time without having to pay taxes. This would be without incurring the penalties that may associate with 401(k) accounts. This is particularly beneficial to employees who are being offered this type of insurance are part of a non-qualified plan: the employer pays the premiums and the employee sees a guaranteed cash growth.
Does term insurance save me money?
If the cash-benefits of whole life seem like a good idea, it’s because they are. The cash benefit of a whole life insurance policy can be used to supplement retirement or your income. The key word being “supplement.” You can use your cash value toward your retirement; however it may not yield you the results you need.
For one thing, the premiums on whole life insurance are expensive. You will be able to save money by sticking with term life insurance and investing the difference in premium prices.
Additionally, cash value plans do not see the same type of growth as other plans. This is particularly important to note, as older individuals are often targets for whole life insurance policies. The cash growth of a whole life insurance policy could take 20-30 year to accrue. It is enough to make a difference in your retirement savings plan.
Whole life insurance plans may also not provide a large enough death benefit to protect your loved ones. The draw of term life insurance is that you pay cheaper premiums for a larger death benefit. The goal of life insurance is to financially protect your family when you are no longer around to do so. It’s best to go with a policy that does just that and to invest your retirement savings in another way.
The exception: If you happen to be a key executive in a company and you offered a whole life insurance policy as part of a non-qualified pension plan, then you should absolutely take it. However, you may want to consider purchasing enough term life insurance to cover any debts. As well as another retirement savings method that affords you a larger return on your investments. Speaking to a financial planner can help you allocate your finances accordingly.
Whole life insurance can be an excellent supplemental source of retirement funding. It can also be an excellent supplement to a term life insurance policy. However, you should never use it as a sole retirement or life insurance option.
If you should add a permanent life insurance policy to your retirement plan, speak to one of our trusted financial advisers today.