When planning for retirement, the traditional advice is to invest in options like 401(k) plans, IRAs or pensions. However, there’s another option to put into your retirement tool kit: life insurance policies.
While life insurance is useful to have as a safety net for family, should you pass away. It can also help you out while you’re still alive to enjoy the benefits in retirement.
Experts explain the double benefits of buying life insurance policies.
Whole Life Insurance Earns a Cash Value
Whole life insurance is more than just a death benefit, according to James DesRocher, founder of TrueView Financial. “The cash-value component is what sets it apart from other types of life insurance. As you pay your premiums, a portion of each payment goes into a cash-value account, which grows over time.”
Even better, the growth of that cash value is guaranteed regardless of market conditions. “This offers peace of mind, knowing that your asset is steadily increasing in value year after year,” DesRocher said.
Tax-Advantaged Growth
Additionally, the cash value in a whole life insurance policy grows on a tax-deferred basis, meaning you don’t pay taxes on the gains as they accumulate. This allows your wealth to compound more efficiently over time.
“Additionally, when you access the cash value through policy loans, those funds are generally tax-free, providing a significant tax advantage compared to other retirement accounts,” DesRocher said.
Accessible at Any Time
Unlike many retirement accounts that have restrictions and penalties for early withdrawals, the cash value in a whole life insurance policy is accessible at any time, for any reason.
“Whether you need funds for an emergency, a major purchase or to supplement your retirement income, you can tap into your cash value without worrying about penalties or taxes. This flexibility makes whole life insurance a valuable financial resource throughout your life,” DesRocher said.
However, keep in mind that any amount borrowed and not paid back will reduce the death benefit, according to Stephen Kates, CFP and principal financial analyst for Annuity.org.
“This dual purpose allows permanent life insurance to be a more flexible product, but at a cost roughly five to 10 times higher than an equivalent death benefit on a term policy. The earlier a policy is purchased, the lower the cost is likely to be, given typically better health and assumed mortality statistics,” he said.
It’s a Versatile Financial Tool
The cash value in your whole life insurance policy can also serve multiple purposes, DesRocher explained.
- Supplementing retirement income: As you approach or enter retirement, the cash value can provide an additional stream of income, allowing you to preserve other retirement assets or delay Social Security benefits for a larger payout.
- Emergency fund: Your whole life policy could act as a readily accessible source of funds in times of need.
- Estate planning: The guaranteed death benefit of whole life insurance ensures that your loved ones will receive a tax-free inheritance.
Short-Term Life Insurance Is Another Option
For most people, life insurance is not primarily a retirement investment vehicle; it is meant to offset the risk of early death and pass on assets to heirs who might need financial support, Kates said.
If you are buying life insurance, Kates suggested that the first option should be term life insurance, as it is cheaper and provides the necessary coverage during a period of time when financial responsibilities such as a mortgage, child care or college education will need to be covered.
“While certain permanent life insurance policies can accumulate cash value at varying rates in order to be leveraged for future borrowing, these should only be positioned as retirement investment vehicles after many other options have already been exhausted,” Kates suggested.
Term insurance is the most financially efficient option for providing pure coverage for an early or unexpected death, he said.
“The primary risk life insurance is designed to cover is the financial and emotional hole left in a family when a parent or loved one dies,” he explained.
Before You Purchase Life Insurance
Before you run out to buy life insurance, Kates suggested you do the following:
- Maintain a fully funded emergency fund
- Max out an employer-sponsored retirement plan such as a 401(k)
- Fund an IRA up to the annual limit
- Build a healthy taxable brokerage account
- Contribute funds into a deferred annuity for additional growth or a fixed rate of return
Hybrid Life Insurance Can Support Long-Term Care
Another type of life insurance to consider, Kates said, is hybrid life insurance with long-term care riders, which can support retirees who need long-term care in their old age. The policy will support payments for care that subtract from the death benefit.
“Any money left will be passed on to heirs. While this is primarily a healthcare need, data from the Center for Retirement Research at Boston College shows that roughly 4 in 5 retirees may require some care during their retirement.”
It’s Good for Specialized Needs
As time goes on, your need for general life insurance declines and your needs become more specialized, according to Matthew Argyle, CFA, CFP and IRS enrolled agent and principal at Encore Retirement Planning LLC.
“For those with concerns about the uncertain nature of markets, permanent life insurance can be a good option for funding specific post-life goals,” he said.
For example, if you want to make sure a certain amount of money is available to fund college education for grandchildren or great grandchildren, you could open a 529 plan or buy a permanent life insurance policy, he said. In 2026 when the estate tax exclusion is reduced, you may want to buy insurance to pay estate taxes. Especially if you have illiquid assets. And you might also use this kind of life insurance for funding the continuity of a business, funding a trust, charitable giving or other unexpected life events.
Life Insurance Isn’t a Cash Cow
While life insurance can support you in retirement, Argyle warned it’s not good to bank on that as your only plan, “Life insurance is risk-pooling first and always. Any accumulation you get is only after life insurance costs are paid. This makes life insurance a poor accumulation tool.”
Be sure to stick with tried-and-true methods of retirement savings as well.