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Can Life Insurance Be Used as a Retirement Plan?

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When it comes to retirement, life insurance provides an enormous amount of value, but is it enough to act as a standalone retirement plan?

If you’re considering using your life insurance plan in place of traditional retirement options like a 401k or IRA, you’ll want to read this guide to gain a better understanding of why it may be best to hold off.

Life insurance vs retirement plans

What is life insuranceLife insurance operates similarly to other insurance plans in which you will pay a premium, usually monthly, to receive coverage. Upon your death, the beneficiary listed on your life insurance policy will receive the allotted payout.

If you have multiple beneficiaries or need to do further planning, you may also choose to have a life insurance policy paid directly to your estate and divvied up according to your wishes.

Regardless, the primary purpose of life insurance is to help your dependents continue living a quality life in your absence.

What is a retirement plan?

Alternatively, a retirement plan is used to fund your lifestyle without having to work. Common types of retirement plans include a 401k or IRA. 

While life insurance and retirement plans have a primary purpose, they can also offer secondary benefits. 

Benefits of life insurance

With the definition of life insurance in mind, it’s important to consider the other benefits that the financial tool can provide.

One example of incomparable benefits is in the case of a whole life insurance policy. With a whole plan (rather than a term life insurance plan), the value will grow over time.  

This process is comparable to the equity you may build up when owning a home and making payments over time, building the overall value.

Just as you may borrow against your home’s equity, you may also access the cash value of your life insurance plan in alignment with the provider’s guidelines.

You can use these funds to cover unexpected medical expenses, home repairs, or any other financial needs that arise in life.

So, with these benefits in mind, is this cash value enough to sustain a long-term retirement? The answer is: not likely.

How the cash component works

The first problem with relying on a life insurance policy for retirement is the limit in accessible value.

It’s unlikely that your life insurance policy will have amassed enough value to sustain your entire retirement, let alone support loved ones during that time as well.

Additionally, if you decide to access the cash value of your life insurance plan while still living, the final benefit amount of your policy will be lowered accordingly.  

So, if you borrow against your policy to live on during retirement, your beneficiaries are likely to receive a smaller payout upon your death. In the end, the process can make the overall purpose of the life insurance policy ineffective.

Using a life insurance policy in conjunction with a retirement plan

Rather than relying entirely on a life insurance policy as a way to survive during retirement, it’s recommended you use life insurance as a supplemental tool instead.

When life insurance is used as a secondary tool rather than the sole retirement solution, it maintains the original purpose of providing a death benefit.

The peace of mind that comes with knowing your family will financially be cared for is immeasurable. Knowing this, you can also choose the right retirement plan, allowing the two to work in tandem. 

When done right, any cash component of the life insurance policy can be reserved for emergency use, while you use retirement savings from 401k or IRS method to live on.

The bottom line

When it comes to the question of whether life insurance can be used as a retirement option, the answer is usually a ‘no’.

Life insurance alone cannot provide the coverage that you or your family need during the later stages of life.

Instead, talk with a financial advisor to see how a life insurance policy can fit in with your retirement plan to create a well-rounded approach to financial security.

Simona LeVey did her degree in psychology at Tel Aviv University. She is interested in mental health, wellness, and lifestyle.

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