Can someone use their life insurance in their retirement plan?
Let’s first explore what retirement looks like these days. For clarification, the main difference between a strictly unemployed person and a retiree: Someone in retirement currently has some type of income. This retirement usually comes in one of two different ways:
- Either a pension or some type of investment like a 401k or IRA.
- Government funds such as Social Security.
- Saving a lump sum of money and withdrawing from it regularly, such as an inheritance or an annuity.
For the example below, let’s assume you don’t have a pension from your company nor a 401k or IRA. In this scenario, your retirement would be 100% dependent on your savings.
The amount you require to successfully retire is dependent on two main factors:
- The annual income that you desire during your retirement years.
- The length of time you desire to have that income aka as RETIREMENT YEARS.
To keep things simple, say you want to retire at 65 years old with the same retirement income per year as your pre-retirement income per year – $50,000. According to the World Bank, the average life expectancy in the US is 79 (as of 2015).¹ Let’s round it up and call it 80 for our example which means we should plan for income for a minimum of 15 years. (For our purposes here we’re going to disregard the impact of inflation and taxes to keep our math simple.) With that in mind, this would be the minimum amount we would need saved up by age 60:
$50,000 x 15 years = $750,000
There it is: to retire with a $50,000 annual income for 15 years, you’d need to save $750,000. The next challenge is to figure out how to get to that number (if you’re not already there) the most efficient way you can. The more time you have, the easier it can be to get to that number since you have more time for contributions and account growth.
If this number seems daunting to you, you’re not alone. The mean savings amount for American families with members between 56-61 is $163,577² – nearly half a million dollars off our theoretical retirement number. Using these actual savings numbers, even if you decided to live a thriftier lifestyle of $20,000 or $30,000 per year, that would mean you could retire for 8-9 years max!
One option that you could consider is a tool that you don’t normally consider when preparing for retirement. Your life insurance policy.
One of the benefits of a permanent life insurance policy is the ability to accrue “cash value”. In its simplest form, the cash value within a policy is the balance remaining after a portion of a premium payment is applied to insurance costs. It is this feature that provides a few different uses for life insurance in retirement. The cash-value account grows over time and can be withdrawn as a source of income as long as the withdrawal amounts don’t exceed the amount paid in premiums.
Another option is to borrow from the cash value. Think of it as a loan you are getting form your future self. Technically, you’re not required to pay it back, although it will accrue interest and ultimately the loan amount will be deducted from the death benefit (which is the amount paid to your family upon your death).
This brings up another discussion point: Term Life Insurance. This is life insurance that does NOT provide a cash value option, does not have a withdrawal or borrow opportunity but it DOES provide a death benefit coverage for your beneficiary(ies). If your term policy is close to expiring or you only have a term policy through your employer, you need to obtain a new illustration to see what the cost might be in your retirement years and even IF you can qualify at that point. Weighing out the cost now for your current self, versus the cost your future self could pay has to be considered now.
All of this information may be hard to hear for the first time, but it is the first real step to preparing for your retirement. Knowing your number gives you an idea where you want to go. After that, It’s figuring out a path to that destination. If retirement is one of the goals you’d like to pursue, let’s get together and figure out a course to get you there — no math degree required!
¹ “Life expectancy at birth, total (years).” The World Bank, 2018, http://bit.ly/2I8w4gk.
² Elkins, Kathleen. “Here’s how much the average family in their 50s has saved for retirement.” CNBC, 4.21.2017, http://cnb.cx/2FX0Ckx.
₃ Investopedia. Do You Need Insurance After Your Retire? Tim Parker. January 7, 2016.