Most people who buy life insurance want to replace income if
they die prematurely, and that's as it should be, according to many financial
advisers. These customers can opt for a term plan that ends once they retire.
However, it's also
possible to use a permanent life
insurance policy to fund retirement
plan company by taking withdrawals from the plan's cash reserve.
This strategy isn't
without potential pitfalls. "There have been many articles written on why
whole life insurance isn't an investment vehicle. Most have to do with high
cost and lack of liquidity," said Jim
Ludwick, a certified financial
planner with Main Street Financial Planning.
Still, permanent life insurance can be a valuable part of some
investors' retirement strategies. Are you one of them?
You can afford a permanent policy
Not certain where life insurance fits into your budget? A
permanent policy definitely isn't for you. Premiums are much higher than those
for term policies, and it's harder to get out if bills become too high. In
addition, it's best to overfund the policy in its early years if you want to
draw on the reserve later.
"It would take
20 years for the returns inside your whole life policy to look reasonable as an
offset to the front-end cost. Owning one is like running a marathon," said Stephen Northington, a certified
financial planne in Little Rock, Ark.
If you're confident that you can afford a permanent policy, it
might be a good retirement investment option. On the other hand, if your budget
is tight, another kind of retirement plan would be better.
You're contributing the maximum to other retirement plans
Individual retirement accounts and 401(k)s are popular retirement
investment options for good reasons. Both offer tax advantages to
users, unlike typical brokerage accounts. They also give users flexibility in
investment options and costs, particularly IRAs. If fees are eating up too much
of your profit, you can always switch funds.
Cash value accounts may not achieve the same level of growth.
Ludwick estimates that most currently make around 3%, and investment choices
are often limited.
But there are
upsides. "Cash values that are invested by the life insurance company in
their general account aren't correlated to stock market returns, and they don't
go down in value in rising interest rate environments like bonds and bond
mutual funds do," said Brian
Frederick, a financial planner in Scottsdale, Ariz.
[source http://www.marketwatch.com/story/how-to-fund-retirement-with-your-life-insurance-2014-10-27]