How a Life Insurance Can Help You with Retirement Planning

Shawn Plummer

CEO, The Annuity Expert

A life insurance policy is a valuable asset to have when planning for retirement. Contrary to popular belief, a life insurance policy can be used for more than just providing financial security for your loved ones in the event of your death. In fact, there are several ways that a life insurance policy can help you with retirement planning. Here we will discuss three of the most important ways that life insurance can help you prepare for retirement.

How Does Life Insurance Fit In Retirement Planning?

Now let’s talk about life insurance. This is an important piece of the puzzle when it comes to retirement planning, as it can provide a financial safety net for your loved ones in the event of your death. There are two main types of life insurance policies: term life insurance and whole life insurance. Term life insurance provides coverage for a set period of time, typically anywhere from ten to forty years. Whole life insurance, on the other hand, covers you for your entire life and also builds cash value over time that you can borrow against or cash out in retirement.

In retirement planning, life insurance can be used in several ways such as:

Why Would Anyone Use Life Insurance As A Retirement Plan?

Many individuals are concerned about retirement planning. Here are a few reasons why:

  • There may be a reduction or elimination of employer-sponsored retirement plans. Employers may no longer provide the same excellent retirement packages as they did in the past, or they may have completely gotten rid of them.
  • You may be wanting to contribute more money to a retirement plan, but you cannot because you have already reached the contribution limit. You may be worried that this will leave a gap in your retirement income.
  • Limitations of plan choice and flexibility. Many financial planning vehicles have contribution limitations and are susceptible to market fluctuations.

What Is Retirement Planning Life Insurance?

Permanent life insurance products, like whole life, universal life, and variable life insurance, are often called “life insurance retirement plans” because of the cash value component.

One of the benefits of a permanent life policy is the ability to save money. This savings component is done by paying premiums, and part of this money goes towards the cost of insurance. The cash value that is leftover can be used in different ways when you retire.

Cash Value

The cash-value account grows over time and can be withdrawn as a source of income once you retire. And provided the amount withdrawn doesn’t exceed the amount you’ve paid in premiums, it won’t be subject to taxes.


You can also use life insurance for retirement income by borrowing from your cash value. This withdrawal is like a loan you are getting from yourself. You don’t have to pay it back, but it will have interest accruing. The loan amount will be taken away from the death benefit (the money that is paid out to your family when you die).

How to Create Tax-Free Income in Retirement with Life Insurance

When it comes to taxes in retirement, many people are looking for ways to keep more of their money. One way to do this is by using life insurance products that can create tax-free income. By using life insurance in retirement, you can keep more of your hard-earned money and have peace of mind knowing that your loved ones will be taken care of financially.

During your working years, life insurance can provide you with financial security

A life insurance policy is a key part of a solid financial plan. It can help you make sure you have money coming in if you die before you retire. Plus, life insurance can stay in place after you retire to provide an income for your family or to create a legacy.

At retirement, there may be a tax-free income source.

Permanent life insurance designed with the potential for cash value growth gives you income options in retirement. The key option is the ability to withdraw the policy’s potential cash values through policy loans or withdrawals to help supplement retirement income.

Additional benefits of life insurance

With accelerated death benefits, your clients can get some of the proceeds from their life insurance policy if they are terminally ill or need to pay for a nursing home. This is a helpful living benefit that works during both the working years and retirement without costing any extra money.

The Advantages Of Leveraging Life Insurance For Retirement

  • Policyholders may feel more secure in their financial futures from the start, thanks to death benefit protection when their loved ones need it most.
  • Life insurance can provide a death benefit to the surviving spouse or other beneficiaries even after retirement. This is in addition to the death benefit protection during a client’s working years.
  • Investors can adjust their premium payments based on their available resources with a universal life or an indexed universal life (IUL) insurance policy. Additionally, life insurance is not a qualified plan, so it is not subject to tax-qualified plan contribution limits.
  • There’s no age restriction on using a life insurance policy loan. Policy loans from your life insurance policy may be used for any purpose and are usually tax-free.
  • You can change the life insurance policy to meet their needs. This same flexibility might not be available with other planning vehicles.
  • With life insurance, any potential cash values grow on a tax-deferred basis.
  • Accumulated cash values in a policy can be taken as generally tax-free loans and withdrawals, as long as the policy isn’t a Modified Endowment Contract (MEC). Up to the cost basis, withdrawals are income tax-free.
  • You can access the policy’s cash value without a tax penalty if you don’t withdraw the money from a policy that is like a qualified plan.
  • During retirement, withdrawals from qualified retirement accounts are usually taxed as regular earnings. Taking money both from your retirement accounts and your life insurance policy might help you stay in a lower tax bracket.
  • There are no required minimum distributions (RMDs) for life insurance. Your clients are not required to take RMDs from their assets and may keep any accrued values.

The Disadvantages Of Leveraging Life Insurance For Retirement

  • If you want to keep your desired death benefit, you may need to pay more money. If you take out a policy loan or make a withdrawal, it will reduce the death benefit and might cause the policy to end. Withdrawals may have fees that will reduce the death benefit and cash value.
  • Your life insurance policy may not be able to guarantee that you will not lose money, depending on how much money you put into it. You must meet the minimum payment requirements to keep the policy going and make sure that the policy does not become over-loaned.
  • Your premium payments for life insurance are not tax-deductible.
  • You should avoid creating a Modified Endowment Contract (MEC). This is because life insurance policies that surpass certain premium limits can be classified as a MEC. MECs may be subject to unfavorable tax treatment.
  • Permanent life insurance policies require you to pay money every month. This includes the cost of the insurance, as well as other charges. These charges may reduce the cash value of your policy.
  • If you want to take money out of your life insurance policy, you may have to pay a penalty. The amount of money that is available for loans may also be limited.

Who Is Retirement Planning Life Insurance Designed For?

  • Pre-retirees between the ages of 30 and 60.
  • Consumers who are concerned about their family’s financial security if they pass away while working.
  • Entrepreneurs that are self-employed, members of a partnership, or corporate-employed.
  • Looking to add extra financial security in retirement years
  • Have maxed out contributions to their IRA and 401(k) or don’t have a qualified plan.
  • You may be unhappy with your retirement-planning strategies losing money because of market conditions.
  • Investors looking for ways to find taxed-advantaged solutions

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If you are looking for a way to provide death benefit protection during your working years, while also having the potential for tax-deferred growth and access to cash values in retirement, then permanent life insurance might be right for you. request a quote, please contact our office today. If you’re looking for more information on how to create tax-free income in retirement, be sure to contact us and request a quote.

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Shawn Plummer

CEO, The Annuity Expert

I’m a licensed financial professional focusing on annuities and insurance for more than a decade. My former role was training financial advisors, including for a Fortune Global 500 insurance company. I’ve been featured in Time Magazine, Yahoo! Finance, MSN, SmartAsset, Entrepreneur, Bloomberg, The Simple Dollar, U.S. News and World Report, and Women’s Health Magazine.

The Annuity Expert is an online insurance agency servicing consumers across the United States. My goal is to help you take the guesswork out of retirement planning or find the best insurance coverage at the cheapest rates for you. 

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