The idea of retirement looks a little different for everyone. Some of us envision spending our golden years traveling the world, while others may prefer a quiet life filled with gardening and golf. Regardless of your vision for retirement, though, chances are that you are planning today to ensure financial security in those years after your career ends.
It’s no wonder, then, that permanent life insurance coverage is frequently recommended as part of retirement planning. But are these whole or universal life policies really beneficial enough? And is the higher price tag that accompanies permanent life coverage actually justified, especially when it means paying those larger premiums for decades to come?
Term Life Insurance and Retirement
Depending on when you purchase term life insurance, it can be an important part of retirement planning. For starters, it can serve to pay off the mortgage on the family home, cover future educational expenses for the kids, and even replace savings efforts from a spouse who has passed away.
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If something were to happen to you during your biggest earning years, term life insurance coverage is an affordable way to protect and provide for your family for decades to come.
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Even as you approach retirement, term life insurance has its benefits. Sure, you may not have a mortgage, student loans, or minor children to worry about anymore; however, if you and your significant other aren’t quite ready for retirement, a term life policy can help protect your spouse and ensure success in their own retirement efforts.
But while all of this is fine and dandy, term life insurance does have its limitations, especially in your older years.
The problem with term coverage
The biggest problem with term coverage is that it isn’t permanent. Through LeapLife, for instance, you can buy between 10 and 40 years of term life insurance from a number of top carriers, such as Principal, Pacific Life, and Mutual of Omaha. However, this coverage will only protect your loved ones for a specific, temporary period of time. Depending on when you buy your policy and the term you choose, this might not even reach retirement age.
The next problem is that term life insurance doesn’t build up any sort of cash value. It provides protection for the policy’s term period, but once that ends, the money you’ve paid into premiums is simply lost.
The Argument for Permanent Life Insurance
If you’re looking to include life insurance in your retirement planning efforts, there are many arguments in the permanent coverage column. Here are some reasons you may want to consider buying a whole or universal life policy to plan for the long-term future.
It can act as a retirement savings vehicle
Arguably the biggest benefit to long-term life insurance coverage in terms of retirement is that permanent policies build up a cash value. Depending on the policy, this cash value can earn interest over time, helping you create a dual-purpose nest egg that also provides death benefits.
If needed, you may be able to pull from that cash value prior to your passing. Some permanent life insurance policies allow for early withdrawals and/or loans, while others enable you to pay premiums with your accrued balance. Either option can prove beneficial in your post-career budget.
It’s ideal if you need to protect a loved one long-term
Term life insurance is an excellent idea if you want to protect your kids while they’re small. But what if you have a loved one who will need care for an extended period of time?
If you have a child or spouse with special needs, for example, permanent life insurance is usually a much better fit than term coverage. This type of policy not only protects your loved one with a death benefit no matter when you pass away, but the accrued cash value that we already mentioned can also be drawn from in the future if it’s needed.
If you foresee needing to provide life-long or long-term care for a child, spouse, or other loved one, permanent life insurance might be a worthwhile expense, even well into your retirement years.
Policies often include benefits like long-term care coverage
A large percentage of the population will need some level of long-term care in the future. Depending on the extent of the care needed and how long it’s required, this can potentially wreck your and your spouse’s retirement savings.
Many permanent life insurance policies allow for long-term care benefits, however. By adding this option to a whole or universal life policy, you are able to protect against potential long-term care needs with an affordable rider, while also maintaining life insurance protection.
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Why Long-Term Life Insurance Might Be a Bad Idea
There are few things to keep in mind when purchasing long-term life insurance for retirement, however.
High premiums
Permanent policies are significantly more expensive than comparable term life coverage, and the premiums may last the rest of your life. While the accrued cash value can be used to pay premiums later on, doing so will eat into the policy’s overall benefit. Failure to pay premiums can also result in coverage lapsing, or the policy can be surrendered (but incur fees).
Cash value growth isn’t guaranteed
Permanent life insurance policies may build a cash value and have the potential for interest growth. However, compared to other (also not guaranteed) investments, these may be a less lucrative option.
This is especially true when compared to investing in your younger years, when you are more risk-tolerant. Consider whether those monthly premiums would better serve your retirement efforts in a dedicated investment account, such as a 401(K) with an employer match.
Does Life Insurance Actually Need to Be Part of Your Retirement Plan?
As with many personal finance situations, the answer to the question of whether or not life insurance needs to be a part of your retirement plan is truly, “it depends.”
You may need permanent life insurance coverage that lasts well into retirement, especially if there are certain concerns and considerations. For instance, if you need to provide for a loved one with a disability or special needs — or want a policy that also provides disability or long-term care coverage for yourself — whole or universal life could be the right answer. It’s also worth considering if you want a policy that builds a cash value, which you can pull from over time if needed.
For everyone else, though, life insurance might not make sense once you reach retirement age, especially if your kids are grown, the house is paid off, and you have sufficient savings. In many cases, affordable term life coverage that protects you until these milestones are met might just suffice.
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This content was provided by LeapLife. Kiplinger is not affiliated with and does not endorse the company or products mentioned above.
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