Smart Ways to Use Life Insurance for Retirement

Life insurance companies often recommend permanent life insurance which accumulates cash value to be used to invest in the future. To help with retirement planning, However, these policies are generally only suitable for those who have a net worth of $11,700,000, which is the minimum (as of 2021 and will rise in 2022 and reach $12,060,000) at the point that federal estate taxes kick into effect following the death.

1. For most people the most effective way to integrate an insurance plan for retirement is to purchase an ordinary term life insurance policy that provides a sufficient death benefit, and then put any additional disposable income in retirement accounts that are tax-advantaged.

KEYNOTE

If you require an insurance policy for life, the term policy will provide you with the greatest amount of value for your cash.

If you purchase term insurance instead of permanent insurance You’ll have more money to put into retirement savings.

You might also wish to establish an emergency fund and also purchase disability insurance to secure your earnings.

Step 1: Buy Term Insurance

Apart from perhaps those who are independently wealthy, anyone with dependent children or others who depend on their income for assistance needs to have life insurance. That’s also true for so-called “nonworking” spouses–stay-at-home parents or homemakers, for example.

“For the working spouse, you want to have enough insurance to cover large debts (such as a mortgage), future obligations that can no longer be funded by the earnings of the deceased (such as costs for college or retirement), and living expenses for the family,” says Kristi Sullivan, CFP, of Sullivan Financial Planning in Denver.

“The nonworking spouse needs to be insured to cover the cost of child care and other household-management work that the surviving breadwinner will now have to pay for,” she says.

The Basics of Term Life Insurance

The cheapest form that you can get, taking into account not only out-of-pocket costs but as well how much coverage you can get in exchange for the amount, is called term life insurance (sometimes called “pure life insurance”). It will pay the stated death benefit within the specified time period, such as 10 30, 20, or 30 years, but does not have a cash value element. If the term runs out the policyholder has the option to renew the policy for a new period, change into permanent insurance, or let the policy end.

Life insurance rates vary based on an individual’s age health, age, and other aspects. For instance, a non-smoker 35-year-old male with good health may be able to purchase a term insurance policy of 20 years that has a $1 million death benefit for around $1,030 annually. If the same man purchased an entire life insurance policy which is a form of permanent life insurance the price could be higher than $13,500 per year to receive the exact death benefits.

With these expenses that are incurred, term life insurance could be a valuable saving tool for retirement in two different ways. First, it offers financial security for a family in the event that someone who is the primary breadwinner passes away without accumulating enough savings enough for their family members to survive. The second benefit is that the affordable cost frees up available income to fund other goals.

“Given the lower premiums associated with the policy, investors will have more to invest for retirement, college, or other financial goals,” says Mark Hebner, founder and president of Index Fund Advisors in Irvine, California, and author of Index Funds: The 12-Step Recovery Program for active investors.

Special Considerations

The length of time a policyholder requires is contingent on how long in the future other people will likely depend on them. If their children have reached the age of adulthood and are financially secure, they might not need life insurance, or even as much as they would like to.

The amount of life insurance to purchase will depend on how much the family’s replacement income will require, and for how long they’ll require it. Large debts like mortgages and costly future obligations like college tuition ought to be included in the calculation.

A lot of people receive some form of life insurance in the form of an employee benefit while they work. However, this isn’t always enough for a family and the employee may have to add more by purchasing an individual insurance policy.

Step 2: Create an Emergency Fund

The best method of putting the savings of term life insurance is to create an emergency fund of up to three or six months’ expenses for living. A fund for emergencies to be able to cover unexpected expenses that arise can enable you to maintain your retirement contribution in check.

The proportion of Americans who claim to have not more than 3 months’ worth of expenses paid with an emergency fund.

Step 3: Consider Long-Term Disability Insurance

Disability insurance may replace income when a person becomes disabled and unable to work. Similar to life insurance, a lot of people could have some coverage for disability as an employee benefit however, this isn’t always enough. Social Security Disability Insurance (SSDI) is another option however the benefits offered are minimal and getting it isn’t always easy.

You can also purchase an insurance policy for disability through a private insurer. There are many types that are disability-related insurance. A self-employed policy protects someone who is unable to be employed in their former job due to a disability, whereas an all-occupation policy protects someone who is unable to not work anymore.

If you’re looking for disability insurance, search for a guaranteed renewable, non-cancelable insurance policy that will ensure that premiums don’t rise and re-qualifying isn’t an issue. The policy is in effect until the premiums are paid.

Step 4: Invest the Rest

“Buy term and invest the rest” is a well-known expression in the field of personal finance, with the “rest” being the difference between the cost of a term life insurance and a life insurance policy that is permanent. As mentioned above you might want to allocate a portion of that surplus to creating an emergency fund as well as purchasing disability insurance. What is the best place to invest the remainder of the cash (and any other money you’re able to spare)?

If you’re looking to retire as your ultimate target, a tax-advantaged account, like the conventional or Roth IRA could be your best bet, provided that your income limitations and other conditions. Maximizing the benefits of your 401(k) or similar plans at the workplace is another option, in the event that you’re not already doing this. (If you’re looking for something more immediate than retirement, keep in mind that typically, you need to be 60 1/2 years old to be able to withdraw funds from a retirement account without penalty.)

4 If you’re not eligible for such accounts, you are able to invest outside of retirement accounts, however, you’ll not get all the tax advantages. A low-cost option could be an index fund that is offered by an investment company that is a mutual fund or brokerage company.

The Bottom Line

Many people don’t think of the term “life insurance” as a means to assist them in achieving their retirement goals. However, for many people who are not yet retired term life insurance (along with the investment of the savings it earns) could be a crucial element of a successful strategy.