Integrating
Whole Life Insurance

into Your Retirement Plan

By: Francis Choy, CPA

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As fewer companies offer pension plans to their employees, it is common for people to participate in their employer-sponsored 401(k) or 403(b) plan. Self-employed individuals who have earned income can set up an IRA: either a traditional account, Roth account, or both. Regardless of which retirement plan you have, your contribution is most likely invested in stocks, mutual funds, or bonds, which are volatile due to market risk or interest rate risk. However, there is another financial product that people sometimes overlook, which can complement their retirement strategies.

 
Permanent whole life insurance can be a good supplement to your retirement income and complement to your financial portfolio providing stability and an emergency fund in times of need. When you stop working and decide to start drawing income from your retirement account, a market downturn can impact your portfolio values, and you may not want to sell your investments at a lower value or for a loss permanently. Drawing from the policy’s cash value can be a way to provide immediate liquidity and avoid selling investments that have gone down in value. The cash value can be a good buffer asset to fall back on in a situation like this. 


Cash value of the policy gets favorable tax treatment as well; income tax is deferred while your cash value grows over the years. You don’t have to pay income tax on the money withdrawn from your policy up to the amount you funded it. In general, you may also borrow against your cash value with or without paying back to the policy. However, drawing from your whole life policy’s cash value will reduce the total amount of cash value remaining. Taking too much out can eventually cause your policy to lapse, which may have income tax impact if the policy terminates before your death. For guidance, consult your tax or financial advisor. 


If your insurance needs decrease as you get older, cash value from a permanent life insurance policy can provide another source of income during retirement. With the supplement from the cash value withdrawal, and depending on your other income situation, your combined income may put your taxable social security benefits at a lower percentage, which reduces your overall tax burden. There are other options as well, such as a Section 1035 exchange for an annuity. This allows you to trade your insurance policy for an annuity, which may be used to generate lifetime income for as long as you live.


In summary, a whole life policy’s guaranteed cash value provides extra stability to help get you through downturns in the market. It can complement your investment portfolio, potentially allowing you to invest for other higher return products. You can use the cash value for retirement income or to help fund your child’s education. In contrast to its lower return when compared with other investments, the tax-free access-to-cash feature allows more tax savings, which transforms into more spending dollars during your golden years. Whole life policies provide living benefits, and more importantly, financial protection to your family and loved ones.

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