Whole life insurance can be a very helpful tool to help reach retirement goals; however, it is not recommended for everyone. While whole life insurance can be used for retirement purposes, it is not recommended as a primary retirement plan. For those that are already maxing out more traditional retirement plans such as 401Ks or Roth IRAs and want to do more, this could be a great option.
Unlike more traditional term life insurance, whole life insurance is a type of permanent life insurance that provides coverage for the life of the insured. Further, a whole life insurance policyholder can also build cash value in the savings component of the policy. With whole life insurance a payment is guaranteed at the death of the policy holder to their beneficiaries, regardless of the age of the policy holder at the time of their death. For this benefit, the regularly due premium payments are much larger than those of say term life insurance. Due to the higher price that comes with whole life insurance, it only makes sense if an individual is already investing heavily in other primary retirement plans, as those historically will have a higher rate of return over time, as whole life insurance plans have an average annual rate of return on the cash value of 1% to 3.5%. Although there are some very great and less risky benefits that come with this type of insurance plan.
Over time, whole life insurance policies gain a cash value that the policy holder can utilize throughout the plans lifetime, while still guaranteeing their beneficiaries money at the time of their death. The guaranteed cash value that whole life builds makes it a wealth building option that can be used for retirement income or other needs while not fully taking away the lump sum to their beneficiaries at the time of their death. This cash value is a great option to use to help supplement other retirement plans such as a pension or the aforementioned 401K or IRAs or savings when an unexpected expense pops up.
There are many other benefits that come with whole life insurance. For example, whole life is completely uncorrelated to the stock market, due to this it can act as a risk-buffer in retirement. In the event of a stock market correction, someone who also has a whole life policy, can take their immediate income needs from their policy and allow their stock market retirement accounts to heal. Whole life insurance also offers tax benefits for its policy holders. Since the majority of other retirement income is taxed. A policy holder can use the cash value of their whole life plans to avoid entering a higher tax bracket, which is why some call whole life insurance plans “the Roth of the rich.”
While whole life insurance is not recommended as a sole or primary retirement plan, its guaranteed returns can supplement retirement income and be a versatile retirement tool for those that choose to use this retirement and wealth building vehicle.