How to fund retirement with your life insurance

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]