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Permanent Life Insurance, Retirement, and You

Updated on July 20, 2012
Retirement isn't possible with one vehicle.
Retirement isn't possible with one vehicle. | Source

Place for Everything

Before you go to the bottom of the page and start ranting about how permanent life insurance shouldn't be a retirement vehicle life some salesman from Primerica, slow down. There is alot of convential wisdom that tons of people will tell you as to why you shouldn't have permanent life insurance in your retirement plan. I would also encourage you to look at how many people successfully and comfortably retire in America. Probably not nearly as many people that can give you the "correct" advice on what to do with your money and how you can retire.

First thing is that planning for retirement isn't something that everyone can do the same way. There is a time and a place for everything, including a permanent life insurance policy in your retirement plans. Sometimes it isn't a good idea for you to incorporate a permanent life insurance policy in your retirement plans. Two of the easiest to identify is starting too late in life. If you are in your 40's, a permanent policy might cost you more than is fiscally viable for you. You would also have to pay large amounts up front so that you will be the point to take advantage of the benefits of a maturing life policy. Also if you are in a situation where you already have vast sums of money......you probably wouldn't be reading this article.

Fact: Over 90% of People Will Die at Some Point in Their Lives

Life insurance can be hard to talk about because some people don't want to think about or discuss death. But it is going to happen. When it does, it is going to cost your loved ones, among many other things, money.

This is what permanent life insurance should be for, at least in reference to the common American. There are some situations where it is beneficial to buy large policies in which you use the cash value to be your own bank and protect business assets, but that is something better left to discuss with someone alot more versed in life insurance than me. Point is, ideally, you shouldn't purchase a large permanent life insurance policy because you want it to cover things like your mortgage, and your car, and other debts that you are currently paying off. That is what term life insurance is for. If you have a 20 year mortgage, get a 20 year term policy that covers the cost of the mortgage, many times your financial institution can help you get this rolled into your loan payment.

The size of the permanent life insurance policy should be designed with the cost of your expenses in mind. I generally tell people to get a 50k policy, that will take care of final expenses and give your spouse enough money to be able to take proper time off work. All other debts should have term insurance for in the event of your death.

A good reason to think about life insurance.
A good reason to think about life insurance. | Source

But I Wanna Live!

This isn't about how to protect your family in the case of your death though. This is about good retirement planning. Good retirement planning, and good planning actually, has little room for absolutes. You won't succeed without the proper mentality. Rather than looking at your retirement nest egg as "This is so I can enjoy my life when I quit working" look at it as "This is so if I am incapable* of working, myself and my loved ones will still be provided for"

*Over time if successful you get to replace incapable, with unwilling. This is called winning the game of life.

When you replace the first mindset with the second, you look at things differently, with a greater focus on hazard recognition and risk analysis. On your road to retirement, you may die, you may become paralized and unable to work until you gain a new skillset, you might be underemployed for a decade. These things can happen, and if all you ever bought was term policies, you can expect your rates to go up at the end of term, if you can even be renewed at all. A bout of cancer that you beat can almost certainly prevent you from renewing your life insurance policy.

When to Buy

Buy your permanent life insurance policy when you are still young and healthy. The premium is calculated in essentially the same way regardless of if you get a whole life or universal life policy. The Insurance company assumes you will die at a certain age. The take your current age, and the age of predicted death, and spread out the payments in way that the amount paid remains the same over the years. So the younger you are, the more years they divide the total by, and less you pay every month. I would suggest getting this rolling in your 20's. Also, anything that happens to you, getting a diesease, becoming handicapped, anything, cannot make the company cancel your insurance once you are insured.

Benifits Later On

Later on permanent life insurance policies have a cash value that you can borrow from. You can borrow your money at a much lower interest rate than you ever could at the bank, and you pay yourself the interest. Much like a 401k offers. Here is an important difference though, life insurance isn't a high yeild savings vehicle, a 401k is. If you borrow 20k from your 401k, you will loose a lot more in interest towards your retirement than if you borrowed that money from the insurance policy. Both are preferable to borrowing from a bank though, because the interest you pay to a bank doesn't go to you, and is money that could be getting put towards your retirement.

Also if you are able to overpay, you can set yourself on a plan to not have to pay your premium later on in life, the interest and cash value will handle that. Or should the proverbial feces hit the fan, you have a stash of cash that you can take at any time.

Also, life insurance is an inheritance, you can insure yourself for the amount of money you want to leave your children, and they won't have to pay any taxes on it. Just another thought for you. If your own retirement is looking good, think about this one for your kids, might be easier in the long run to pay an insurance premium, than to save the money independently

This is the key role to a permanent life insurance policy as a retirement tool. It mitigates the cost of possible complications along the road to retirement. It by itself cannot secure your retirement. Just like any good retirement plan doesn't revolve around just one mutual fund or stock, 401k, social security, or an annuity. Retirement is complicated, and you need to understand what different financial products can do for you, and how they can benifit you.

The common argument is that if you buy term life insurance and instead of having a policy with a cash value, invest the money in a retirement fund, you will have more money, and as you get older, you need less insurance because you have more in savings. It is a valid line of thought, but, my main arguments against it are 1) If you need to borrow money, you are stuck either borrowing from a bank and paying them interest, or borrowing from your own nest egg, and loosing on the interest that money could be gaining. You could say that your loosing money by having one cash value not gaining as much as the other, but that brings me to 2) permanent life insurance policies have guarenteed growth, something that is valuable in any retirement plan, you need a mixture of some things that grow slowly and surely, and others that grow faster, but can potentially loose. That is how you beat the odds over a long haul.

Any tool on a construction site can cause more damage that it can build if used improperly, financial tools are no different. Take this info and go talk to your retirement specialist, whoever they may be, and discuss if permanent life insurance is a viable option. If you don't have one, or feel that your current advisor may be lacking in a complete knowledge of the tools available, a good first stop is your insurance agent, course they are going to try to sell you insurance, but thats not just cause it's going to make them money, if done properly it will help you in the long run too.

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