Whole life insurance as a retirement supplement
By Steve Kobrin
The Firm of Steven H. Kobrin, LUTCF
Sales literature from many life insurance companies is promoting the idea of using life insurance as a retirement supplement. This idea can make sense in certain cases.
Advantages of whole life
First of all, a word about whole life: It is a guarantee-oriented product. The premium, death benefit, and cash value can all be guaranteed for the life of the contract. In addition, it can accumulate significant amounts of cash. With a strong company, dividend payments can be attractive and grow into large sums over time.
In addition, whole life comes with specific riders to enhance benefits. One is the paid-up-additions rider, which allows for cash beyond the required premium to be deposited into the policy. Another rider will waive the premium if the insured becomes disabled.
Whole life as a strategy
In a retirement planning scenario, whole life can play a strategic role. First of all, many investment advisors stress the importance of investing money in a diversity of products in terms of risk. Whole life, as a guarantee-oriented product, could be part of the conservative portion of your portfolio.
An additional concern in retirement planning is tax minimization. People whose retirement money is invested in qualified plans, such as a 401(k), must pay taxes on their distributions. However, since life insurance is typically funded with after-tax dollars, withdrawals or loans can be structured on a tax-free basis.
Another advantage to the whole life product is that it can be self-completing if the insured unfortunately becomes disabled. Under these circumstances, the carrier can waive the premium and still allow the cash values in the policy to increase. Traditional investment vehicles have no such feature.
Points to remember
Whole life insurance certainly brings certain advantages to the retirement plan as a whole. If you are considering using it in your portfolio, here are some points to remember.
(1) Remember that it is a fixed-premium product. You must commit a portion of your budget to fund it, as required; you cannot vary payment according to your cash flow.
(2) The cost structure of the policy is the key to getting the most benefits. If you do not qualify for the lowest cost due to a history of illness or a dangerous hobby, it may not be a suitable product for you. Be sure to get prequalified for coverage before submitting an application.
(3) Legal, financial, and tax considerations must be addressed when developing your product portfolio and planning to receive distributions. Be sure to consult with professional financial advisors.
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