Life Insurance as Retirement Income: A Surprising Wealth Builder

Life insurance as retirement income might sound unusual at first, but it can be a surprisingly effective strategy for wealth building. As a financial advisor or insurance broker, you can offer your clients a tool that not only provides a death benefit but also offers long-term growth through accumulated cash value. Below, you will find the key considerations to help you and your clients make informed decisions.

Understand life insurance as retirement income

When you use permanent life insurance for retirement purposes, you are focusing on the policy’s cash value component. This cash value grows over time and sometimes allows tax-deferred accumulation, which can become an additional income stream later in life. Instead of relying solely on more traditional vehicles like IRAs or 401(k)s, you can diversify a client’s portfolio with this approach. You help them build an asset that not only protects their family but can also provide supplemental cash flow after they stop working.

Explore potential benefits

Life insurance can be an attractive option for certain clients because it offers more than just a death benefit.

• Tax advantages: Some policies allow cash value to accumulate on a tax-deferred basis, and in certain cases, policy loans or withdrawals can be taken out tax-free.
• Flexibility and control: Unlike some retirement accounts, there are usually no strict contribution limits or early withdrawal penalties, although taking out cash value too early might reduce the death benefit.
• Protection for loved ones: A permanent policy can provide peace of mind. If your clients do not end up needing the extra income, the death benefit remains in place for beneficiaries.

Recognize the potential drawbacks

It is important to note that life insurance as a retirement vehicle is not perfect for every situation.

• Higher costs: Premiums for permanent life insurance can be more expensive than term policies or other investment options.
• Possible policy lapse: If the policy’s cash value is insufficient to cover expenses and premiums, the policy might lapse. This can be avoided with careful planning and monitoring.
• Complex terms: Some clients may find permanent life insurance difficult to understand or manage without professional guidance. Regular check-ins help keep them on track.

Choose the right coverage

Selecting the right policy ensures you maximize both growth potential and protection.

1. Determine the client’s objectives: Ask whether they are more focused on guaranteed growth, flexibility, or protection.
2. Compare policy types: Whole life, universal life, and variable universal life each have unique features and investment options.
3. Review funding strategy: Prevent underfunding or overfunding by working out a premium strategy that aligns with their retirement timeline.

Incorporate it into retirement

Once you identify the right policy, the next step is planning how it fits within a broader retirement strategy.

• Treat it as supplemental income: Encourage clients to use life insurance to fill gaps rather than relying on it as their sole source of retirement funds.
• Monitor and adjust: Schedule periodic policy reviews to ensure the coverage, cash value, and distributions still meet your clients’ changing financial goals.
• Coordinate with other assets: Combine permanent life insurance with more traditional retirement accounts to create a balanced approach that reduces risk.

With careful planning, life insurance as retirement income can be a thoughtful addition to your clients’ overall financial picture. By highlighting its benefits, recognizing the potential drawbacks, and choosing the right coverage, you can help your clients protect their families while creating a flexible source of income when they retire.