It’s all too easy to delay thinking about it. But the sooner you start thinking of retirement, the better off you’ll be. We all want to be comfortable at that stage of our lives and do the things we want to do. But it takes planning to make that happen.

There are many aspects of retirement to consider, and one we’re often asked about is life insurance. Is it a good idea? What role can it play? What’s the best approach?

For many of us, life insurance is something to worry about “later.” Or, if provided by an employer, just another part of the employee benefits package. But life insurance can and should be an important aspect of retirement planning. And don’t forget that life insurance only gets more expensive the longer you wait.

The most obvious use of life insurance is to help guard against financial problems for a spouse or children, simply through payment of the death benefit of the policy. But this consideration might change over time. And there are other facets of life insurance to consider.

The proceeds from life insurance can help maintain a current standard of living, pay educational expenses, support adult children still living at home, fund the replacement of services provided a family caregiver, and keep up with rent or mortgage payments. In essence, it extends the financial support generated by an individual after they pass away.

Determine a Retirement Plan That’s Right for You

Some key questions to consider include:

• Do I have enough coverage now?
• Is it the right type of coverage?
• How much coverage will I need later?
• What are expectations for the financial markets in the short and long term?
• Which type of insurance will best meet my future needs?
• How can insurance be integrated with other retirement assets?
• Should I buy a term or permanent policy?
• If I choose permanent, what type?
• Which provider should I choose?

Life insurance can offer tax-free income, be part of a tax management strategy, and enhance the overall returns from an investment portfolio. 

Let’s take a look at three basic types of life insurance.

Term – Generally the simplest and least expensive form, term insurance is exactly what it sounds like since it’s in force for a specific, limited period of time. It’s typically used as a safety net for income replacement during one’s working years. Or it can help protect retirement savings in later years. Premiums are fixed, but it can be expensive to renew as we age and our health changes.

Permanent Universal – This option is often used to help preserve wealth to pass along to your beneficiaries and/or for income protection beyond the working years. In addition to a death benefit, some policies build cash value that earns interest and can be withdrawn or used for loans. Premiums can be flexible, which has both upsides and downsides. These policies are in place for a lifetime and are generally more expensive than term insurance.

Permanent Whole – Similar to universal life, whole life insurance can be used for wealth preservation and transfer as well as tax-deferred accumulation as an estate planning tool. It’s in place for a lifetime, and premiums are fixed.

An advantage of whole life policies funded through regular, set premiums as opposed to universal policies funded through flexible premiums, is that the set premiums provide a reliable income flow to the provider. That stability can enable the provider to invest the proceeds more aggressively, for a longer term and with less need for liquidity, which often leads to better returns and cash value.

Leverage a Versatile Financial Tool

There are tax benefits to life insurance. The first is that the death benefit goes to the beneficiaries tax-free. Cash value can accrue tax-free as well. But it’s very important to understand the policy guidelines and requirements for withdrawals and loans.

Depending on conditions in the overall economy and financial markets, permanent life insurance that generates cash value can substitute for, or augment, investing in bonds when interest rates are low. Plus, it may provide more stable returns than a fluctuating bond market.

Proceeds from life insurance can help delay taking Social Security income before the age of 70 to maximize that income over time. It can also help you avoid drawing money out of an investment portfolio, if that would require taking a loss in a down market.

As you can see, life insurance for retirement can be a valuable tool in achieving financial stability and reaching your goals in your later years. Here are some things to watch out for:

• Excessive withdrawal and/or loan activity can require additional premiums, or the policy will lapse, leading to a loss of death benefit and application of ordinary income taxes to any cash value earnings
• Be wary of increases in the cost of the policy over time
• Hypothetical projections of value for the policy can be iffy, so look at past performance

Talk to a Professional

In general, a good insurance policy features low internal expenses, a track record of delivering expected returns, and investment options that match your risk profile. It can serve as an integral part of tax and portfolio planning alongside IRAs, 401(k)s and other programs. Remember that life changes. Events like marriage, moving or buying a home, having a child, changing jobs and retiring could signal the need for changes to your financial plan.

The fundamental goal should be to work with a knowledgeable professional to help you sort out the options that are best for you. A great place to start is the life insurance service provided by KeenanDirect for expert guidance, access to multiple providers and enrollment assistance.