Is a Whole Life Insurance Policy Good for Retirement As Well?

by Scott Rutherford

    Whole life insurance is a type of permanent life insurance. The main purpose for buying whole life insurance is to provide cash to your beneficiary when you die. This cash is often used to cover your final expenses, to pay off debts or to ensure that your loved ones will have the money needed to cover other needs. Whole life insurance policies also build cash value that can be used to supplement retirement funds or for other needs.

    Permanent Life Insurance

    One of the main benefits of whole life insurance is that it is permanent. By contrast, term life insurance policies only cover you until the end of a given term. Whole life policies typically cover you until age 100, at which time they mature -- meaning the cash value becomes equal to the amount of insurance coverage. Should you live past 100, the insurance benefit is paid to you. If you die before age 100, the insurance benefit is paid to whomever you have named as beneficiary.

    Cash Value

    Whole life insurance policies build cash value. Typically, cash value begins to accrue starting in the third year after you purchase the policy. Because of this, some people look at whole life insurance as a type of investment.
    When your whole life insurance policy has cash value, you can take a loan up to the cash value from your insurance company. Any amount you have not paid back by the time you die will be deducted from the benefit amount. You can also cash out your whole life insurance policy at retirement or any other time. If you do this, you will receive the cash value, minus any penalties stipulated in the policy, but you will no longer be insured.

    Supplementing Retirement

    You can use the cash value in a whole life insurance policy to supplement your retirement income. Depending on the value of the insurance policy and how long you have been paying premiums, you could have a lot of cash value in your policy. If your cash value is greater than the total amount you have paid in premiums, the amount of gain you realized is taxable as income.

    Your Retirement Portfolio

    Most financial planners recommend a diverse retirement portfolio. Ideally, this should include a pension or 401(k), individual retirement accounts, other investments and some type of permanent life insurance that builds cash value. When you retire, you need to decide whether it's more valuable for you to keep your insurance and leave your beneficiary a tax-free benefit when you die or to cash out of your whole life insurance to use the funds for retirement. If you cash out your whole life insurance policy, you can receive the cash value in a lump sum payout or you can purchase an annuity that will provide an income stream to supplement your retirement.

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    About the Author

    Based in Midland, Mich., Scott Rutherford has been writing music, fiction and poetry since 1989. He also has more than a decade of experience in a variety of Christian ministry positions, including home missionary, pastor, coach and youth pastor.

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