Do You Know the Power of Whole Life Insurance in Retirement?

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When planning for retirement, most people focus on the big stuff — Social Security, 401(k)s, pensions and IRAs. But there’s another powerful tool flying under the radar: whole life insurance. While its primary use is as a death benefit, whole life insurance can also play a strategic role in enhancing financial security during retirement.

Let’s explore how it works, why it’s unique and how retirees and near-retirees can use it to their advantage.

What is whole life insurance?

Whole life insurance is a type of permanent life insurance that provides coverage for your entire life as long as premiums are paid. Unlike term life insurance, which only lasts for a set number of years, whole life insurance includes the potential for a dividend, plus a savings component called cash value. The cash value grows over time, typically at a guaranteed rate, and can be accessed via loans or withdrawals.

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This combination of a death benefit and a cash value component makes whole life insurance a versatile financial tool.

Why choose whole life insurance?

Once you retire, the focus shifts from building wealth to managing and preserving it. Whole life insurance can be a value-add during this phase because it can offer:

A guaranteed income supplement. Whole life insurance policies with cash value allow retirees to borrow against the accumulated value during market downturns or unexpected expenses. This can serve as a financial safety net when other income sources, such as investments, are underperforming.
Legacy planning. The death benefit ensures that your loved ones will receive a payout regardless of market fluctuations — especially meaningful if you want to leave an inheritance or cover final expenses.
Tax advantages. The cash value of whole life insurance grows tax-deferred. When structured correctly, withdrawals can be tax-free and add another layer of tax efficiency for retirees managing multiple income streams.
Market risk mitigation. Because whole life insurance policies are not directly tied to the stock market, they can provide stability in times of economic uncertainty. This makes them a valuable complement to traditional retirement portfolios. Dividends can be paid in cash from the policy tax-free as long as they don’t exceed the amount you’ve paid in premiums.

Using whole life insurance strategically

Retirement often comes with unexpected expenses — medical bills, home repairs or family emergencies. Whole life insurance policies with significant cash value can provide liquidity without dipping into other investments. Review your policy’s cash value and terms for borrowing or withdrawing.

Market downturns can affect retirees relying on 401(k)s or IRAs. A policy loan from a whole life insurance policy during these periods can help retirees avoid selling investments at a loss. Whole life insurance can also serve as part of a broader retirement plan, offering flexibility when markets are volatile.

Some policies include riders allowing the death benefit to cover long-term care expenses, helping retirees manage rising costs of assisted living or in-home care without depleting other assets. If long-term care is a concern, explore whether your policy includes a rider or if adding one is an option.

Whole life insurance is also an excellent tool for passing on wealth to children or grandchildren. The death benefit can equalize inheritances, pay estate taxes or fund educational trusts. Discuss your legacy goals with a financial professional to ensure your whole life insurance aligns with your estate plan.

Consider potential drawbacks

As with any financial product, whole life insurance isn’t a one-size-fits-all solution. Be sure to conduct a cost-benefit analysis to determine if the policy aligns with your retirement goals. Here are some things to keep in mind:

Premium costs. Whole life insurance premiums are typically higher than those of term life insurance. Retirees must ensure they can afford premiums until the policy is paid up.
Loan impact. Borrowing against your policy reduces the death benefit if not repaid, potentially leaving less for your beneficiaries.
Policy selection. Not all whole life insurance policies offer the same benefits. Some may lack features like robust cash value growth or long-term care riders.

How to get started

If you already own a whole life insurance policy, take time to review it and understand your options for accessing the cash value as well as how your policy integrates with your broader retirement strategy. If you’re considering a policy, start by asking these key questions to fine-tune your retirement plan and ensure every financial product works to your advantage.

Does the policy offer guaranteed cash value growth?
What are the premium requirements and can you financially sustain them over the long term?
Does the company that holds your contract appear stable? Is it known for raising its premiums?
Are additional riders, such as long-term care benefits, available?

The bottom line

Whole life insurance is a versatile financial asset that can enhance your retirement strategy as well as protect your loved ones. From providing liquidity to supplementing income, its potential benefits are worth exploring.

You should be able to thrive in retirement — with careful planning and the right tools, you can navigate this phase with greater confidence.

Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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John L. Smallwood, CFP®, is the President and Senior Wealth Advisor of Smallwood Wealth Management, with over 30 years of experience in the financial industry. He is a recognized thought leader and entrepreneur dedicated to helping clients achieve financial confidence through the Wealth Curve Blueprint™, a holistic approach to investment consulting and financial planning. John focuses on mitigating financial risk, reducing tax liabilities and fostering long-term wealth growth and legacy planning.