You May Want to Stick to Life Insurance Basics

Life insurance is often presented to older, successful investors as a means of saving additional money for retirement. But is this a good option for you?

First, it’s important to understand how life insurance works. Traditionally, you buy a policy for its death benefit.

In other words, it is designed simply so that it will pay a sum to your loved ones upon your death. That sum will cover lost income and/or end-of-life expenses.

But life insurance can also be used for retirement planning.

When it’s working as it should, you buy a policy with underlying investment vehicles, and the cash builds up over time.

Eventually you reach a point where you no longer need to pay premiums. Then, when you retire, you can withdraw cash from the policy in the form of a tax-free loan – a loan you never have to repay.

When you use life insurance for retirement income, the only consequence is a reduced death benefit. Which, depending on your circumstances, you may not be concerned with.

This approach can work for many individuals, but success isn’t guaranteed.

The underlying investment vehicles might not perform as well as expected. And if you go about it the wrong way, your withdrawals can trigger a tax penalty.

So before using life insurance this way, you may want to ensure you’ve exhausted other alternatives first. Have you fully funded all available qualified retirement plans, such as 401(k)s and IRAs? Have you looked into an annuity?

If you do want to consider life insurance as a retirement-savings tool, it’s a good idea to talk to your advisor before you do.

He or she can help you investigate the quality of the underlying investments in the policy you’re considering, ensure that you understand the fees, and monitor the policy for you to ensure it’s performing as intended and that there are no undesired tax events.