How Can Life Insurance Be Used In Retirement Planning?
Life insurance is an essential component of financial planning for anyone who has dependents who rely on their income. Term life insurance is the least expensive type of life insurance that provides financial protection to the family if the breadwinner dies before accumulating enough savings for the family to live on. It guarantees payment of a stated death benefit during a specified term and has no cash value component. The policyholder can either renew for another term, convert to permanent coverage, or allow the policy to terminate.
The table below shows the strategies and policy types that can be used to maximize the benefits of life insurance in retirement planning:
| Strategies | Policy Types |
|---|---|
| Build an emergency fund | Term life insurance |
| Buy disability coverage | Disability insurance |
| Invest in tax-advantaged retirement accounts | Life insurance retirement plans (LIRPs) |
| Permanent life insurance |
Investing in tax-advantaged retirement accounts, such as a traditional or Roth IRA, can be an effective strategy to maximize the benefits of life insurance in retirement planning. If you don’t qualify for those kinds of accounts, you can always invest outside of a retirement account. Low-cost options to consider would be index funds from a mutual fund company or brokerage firm.
Life insurance policies that come with a cash-value component allow for the cash-value account to grow over time, which can then be used as a source of income in retirement years. Life insurance retirement plans (LIRPs) are paid via premiums from the policyholder to the insurance company. A portion of the premiums is placed into a cash-value account that is invested and grows over time. This cash-value account is then withdrawn as income in retirement years. However, a 401(k) is almost always better than life insurance as it is a tax-advantaged account with high contribution amounts, and many employers provide matching contributions to employee 401(k) accounts.
Ultimately, the amount of life insurance needed depends on how much replacement income the family will need and for how many years they will need it. Major debts such as a mortgage and expensive future obligations such as college tuition should also figure into the equation.
