Life Insurance Can Help Fund Retirement, but Consider Options Carefully
PUBLISHED BY: LFN Primary
Virginia Beach, VA (Law Firm Newswire) January 26, 2016 – The majority of individuals who purchase life insurance wish to replace their income should they die prematurely.
They can choose a term plan that ends upon retirement. Another option is to pay for retirement by using a permanent life insurance policy, and withdrawing funds from the plan’s cash reserve. However, there are possible drawbacks when using this strategy. According to experts, whole life insurance may not be an appropriate investment vehicle because it is costly and not liquid.
“When considering retirement planning, it is important to obtain sound investment advice in order to prevent any errors from jeopardizing a person’s future income,” said Andrew H. Hook, a Virginia financial planning attorney with Hook Law Center with offices in Virginia Beach and northern Suffolk.
Permanent life insurance may still be an important part of some investors’ retirement plans. The premiums for a permanent policy are much more costly than those for term policies, and it is more difficult to terminate the policy if it becomes too expensive. Furthermore, it is advisable to overfund the policy initially if the policyholder would like to make withdrawals of funds in later years. A permanent policy could be a wise retirement investment choice provided that it is within the budget of the policyholder. But if the cost is prohibitive, another type of retirement plan may be more appropriate.
Other attractive investment choices include individual retirement accounts and 401(k)s. Both provide tax benefits, and offer users flexibility in terms of investment choices and costs. This is especially the case with IRAs. If fees are absorbing too much of the profits, the investor has the option to change funds.
It is possible that cash value accounts may not realize high growth, and there may be fewer investment options. However, there are some favorable aspects of cash value accounts. Cash value accounts that are invested by the life insurance company in their general account have no association with stock market returns, and they do not decline in value in environments in which interest rates are increasing, as do bonds and bond mutual funds.
For those who plan to retire early, permanent life insurance can help pay for the early years of retirement. A retiree can have access to policy cash values on a tax-free basis via loans or partial withdrawals up to the cost basis of the policy. However, there can be unfavorable tax consequences if the policy lapses due to withdrawal of an excess amount of the cash value, or the loan balance was greater than the cash left inside the policy, and was not reimbursed.