Laura Adams is one of the nation’s leading finance, insurance, and small business authorities. As an award-winning author, spokesperson, and host of the top-rated Money Girl podcast since 2008, millions of readers, listeners, and loyal fans benefit from her practical advice. As a professional accountant and financial analyst for several companies, Laura is a trusted source on various financ...

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Written by Laura D. Adams
Insurance & Finance Analyst Laura D. Adams

Leslie Kasperowicz holds a BA in Social Sciences from the University of Winnipeg. She spent several years as a Farmers Insurance CSR, gaining a solid understanding of insurance products including home, life, auto, and commercial and working directly with insurance customers to understand their needs. She has since used that knowledge in her more than ten years as a writer, largely in the insur...

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Reviewed by Leslie Kasperowicz
Farmers CSR for 4 Years Leslie Kasperowicz

UPDATED: Jun 29, 2022

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When I think about life insurance, I think about protection for our loved ones and financial support after we die. However, did you know the right life insurance product can actually help support your retirement?

It’s often referred to as a life insurance retirement plan, and it’s more affordable than most people think especially if you are in your younger working years. In fact, the Insurance Information Institute states that consumers often overestimate the price of a life insurance plan significantly. According to their research, 44% of Millennials overestimate the cost of life insurance by 5 times its actual amount.

So what does a retirement life insurance plan really cost and how can it help support you during your retirement years? Let’s explore both of these questions so you can make the most out of your life insurance plan.

Looking to compare life insurance prices? We can help. Enter your ZIP code to get free quotes from multiple insurers.

The Relationship Between Life Insurance and Retirement

Before we dive into how life insurance can help fund your retirement, it’s important to know what these policies are and what they’re designed to do.

A life insurance policy is a contract between the policy owner and the life insurance company. The insurance company makes a promise to the policy owner that they will pay out a specific sum of money known as the death benefit should the policy owner pass away.

This benefit is to be paid to the policy owner’s beneficiaries which are typically your immediate family, to help cover the costs of burial and other needs of your surviving heirs.

In return, the insurance company must receive the required premiums for the life insurance contract in order to make good on their end of the contract.

Each life insurance policy has 3 specific components:

  • Premium
  • Cash Value – (Permanent Life Insurance Only)
  • Death Benefit

It’s important to pay careful attention to these 3 aspects of your policy, especially if you are considering using your policy to benefit your retirement.

Types of Life Insurance Coverage for Retirement

There are two main forms of life insurance in today’s market which are known as term life insurance and permanent life insurance. The differences between these policies go beyond the price point and the length of coverage.

While term life insurance is the cheaper of the two, it’s also more limited. A term life insurance policy only provides a death benefit. It does not accumulate any cash values and simply ends when the contract length has expired.

A term life insurance policy can be an excellent choice of life insurance coverage for many, even current retirees. However, if we are looking to maximize retirement income potential, we will want to focus on permanent life insurance.

Permanent life insurance is the only type of life insurance coverage that can accumulate cash value growth which can ultimately be used as a supplemental retirement income.

Types of cash value life insurance

  • Universal Life Insurance
  • Indexed Universal Life Insurance
  • Variable Universal Life Insurance
  • Whole Life Insurance

Benefiting from Life Insurance During Your Lifetime

How does life insurance relate to retirement? In spite of its primary purpose being to cover your family and your heirs after you pass away, there are still many benefits you can reap during your lifetime.

This is the “Cash Value” aspect of your plan as previously mentioned. It’s a financial account that accumulates cash on a tax-deferred basis. Simply put, it’s a savings account you can access during your lifetime.

However, that doesn’t mean you can use it any way you please. Every policy has its own terms and restrictions, which can define when and for what purpose you can withdraw money from this account.

This is why it’s important to know the nature of your policy and what you want to get out of it before signing up for one.

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How to Create a Life Insurance Retirement Plan

Now that you have a better idea of what life insurance is and how it’s broken down, we can explain how you can incorporate your life insurance benefits into your retirement planning.

Life insurance isn’t, and shouldn’t be, your only strategy for a financially stable retirement. It’s merely an element; a piece of your retirement plan to help you live comfortably and have a financial safety net when needed.

Below is a step-by-step breakdown of the best approach to getting the most out of your policy, including coupling it with other strategies and growing your cash value withdrawals.

Step One: Properly Equip Your Family with Life Insurance Policies

Unless you live alone, you aren’t just planning for your own retirement but you’re planning on a shared retirement with your loved one. For this reason, you’ll want to shop smart and make sure everyone is covered.

Whether your spouse works or not, make it a point to have him or her select a life insurance policy with a cash value option. Like having two jobs, two policies bring in separate savings aspect and separate withdrawals, thus maximizing your financial support during the retirement phase of life.

Plus, having individual coverage helps ensure your loved ones have enough to cover them should something happen to you.

If you’re looking to save on cost, there are life insurance policies known as joint or second to die life insurance. This type of coverage would insure two life on one policy typically resulting in a lower premium.

The largest drawback to this type of life insurance coverage is that if the surviving spouse needs the death benefit, he or she will not be able to receive it as it only pays out upon the death of the second insured.

Generally, joint or second to die life insurance is ideal in estate planning for high net worth individuals in which their family could be facing estate taxes.

As you shop your policy options, look for what you need while trying to keep your premium as low as possible. Do your research to compare various policies, including the benefits and limitations, so you can get the best bang for your buck.

Your ideal approach is to find an affordable policy that allows you to have a disposable income to build an emergency fund an invest and grow your money for later use.

One of the best ways to do this is by working with an experienced life insurance agent especially one that can offer you several options. For example, Top Quote Life Insurance works with over two dozen highly-rated life insurance companies. This allows us to offer our customers with several coverage options and affordable prices.

Step Two: Put Together Your Emergency Fund

Having money for retirement starts with saving money for retirement. If you haven’t already, create an emergency savings account where you can store emergency funds.

This emergency account should total up to anywhere between 3 to 6 months of your regular living expenses-minimum. If you can add more, do so. This will help protect you against sudden expenses or debts that can drain your retirement fund.

But wait, what does an emergency fund have to do with retirement?

It’s a shield. Your life insurance policy isn’t the one putting away substantial funds for retirement, you are. However, if you accrue debts such as loans or credit card debt for unexpected expenses, you end up throwing away money to interest rates.

Your emergency fund should cover you in the case of a medical emergency or a sudden unexpected large expense. That way you can keep investing in your retirement without putting your contributions on hold when money is tight.

Step Three: Add Long-Term Disability Insurance to the Equation

Too often, people think Social Security will provide them adequate coverage should they need to take advantage of disability benefits. However, this often isn’t the case.

Many people have challenges with qualifying for benefits, much less receiving enough money to maintain a normal quality of life. While every dollar helps, it’s far from being enough support to keep you afloat.

That’s why you’ll want to invest in long-term disability insurance. A good renewable policy that doesn’t run the risk of getting canceled is best. You can lock in a premium price and have the peace of mind to know that once you qualify, you’re forever secure in that coverage.

This will make sure your income will be supplemented if you find yourself acquiring a disability.

Tip: Choose an Own-Occupation Policy vs Any-Occupation Policy

An own-occupation policy is the more expensive of these two insurance options, but it will give you the best coverage out of the two. This will protect your income, which in turn allows you to keep feeding your retirement fund.

Own-Occupation: Will payout a disability benefit if you are unable to work in your current occupation even if you are able to perform work in another occupation.

Any-Occupation: Will payout a disability benefit for a period time but if you’re able to work another occupation, benefits will stop.

Step Four: Invest Smart and Make Your Life Insurance Money Grow

If you’ve followed steps one through three, come retirement you should have a secure flow of supplemental income every month with a comfortable emergency fund should you need it. This opens up the true advantage of your life insurance policy: the ability to pull funds and invest in your retirement.

As we established previously, your life insurance policy options should offer a cash value benefit. You’ll want to invest this money yourself in order to yield the highest return.

Do enough research to find a brokerage you trust. This will help you save money by avoiding various policy fees and commissions that go along with working through your life insurance agent.

Plus, it keeps your investment options open. A brokerage firm will allow you to explore your options and make wise choices that will help you grow your cash value funds.

This will become a part of your retirement portfolio.

Is a Life Insurance Retirement Strategy a Good Fit for You?

Is using your life insurance policy to feed your retirement a plan everyone should use? Ideally, yes, but it’s only effective if you have a strong flow of income.

You don’t buy a life insurance policy to grow your retirement. Instead, you grow your retirement funds using multiple strategies, including your life insurance policy if you have one.

Ultimately, you should buy life insurance for its main purpose: to reap the death benefits should you pass away in order to care for those left behind. Your cash value investment is simply an advantage.

Get Quotes from “Grade A” Life Insurance Companies

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Take a look at our online quote generator to view some possible life insurance rated. A few quick questions lead to instant results as it populates life insurance quotes for you.

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Looking to compare life insurance prices? We can help. Enter your ZIP code to get free quotes from multiple insurers.