Whole life insurance is a type of life insurance policy that offers you fixed premium payments for a set number of years. The policy also guarantees your policy’s death benefit. In addition, whole life insurance has a cash surrender value. This surrender value is a cash reserve, called a cash value, which can be used for retirement.
Benefits:
The benefit of whole life insurance as a way to supplement your retirement is that the cash values in a whole life policy are guaranteed. This means that when you start your policy, you can be guaranteed of a certain minimum level of savings you will have available when you retire.
Features:
Life insurance cash values from a whole life policy generally must be borrowed from the policy. However, dividend-paying life insurance offers some limited withdrawal features in that you can withdraw any cash values from paid up insurance that was purchased with the dividends over the years you’ve owned the policy. You can also take dividends as cash during retirement. In addition to withdrawals from a dividend-paying whole life policy, you can take policy loans. Regardless of whether a whole life policy pays dividends, policy loans are generally structured so that the interest rates are very low or a net zero cost to you.
Disadvantages:
The disadvantages of using a whole life insurance policy for retirement income is that if the policy ever lapses from excessive borrowing, then all of the money that is considered a gain in the policy is fully taxable at ordinary income tax rates. A gain in the policy is all money in excess of the policy premiums you’ve paid.
Prevention/Solution:
To prevent your policy from lapsing, the insurance company you work with should warn you when your loans become excessive or if your rate of policy loans is unsustainable. If interest is being charged to your cash values, this will speed up the time it takes for the policy to lapse due to policy loans. In this instance, you will want to make sure that you are working with a company that offers a reduced paid up insurance policy if your loans put the policy in danger of lapsing, or that you are working with a company with a net zero percent policy loan feature.
Considerations:
When considering using whole life insurance for retirement income, make sure that you are paying high premiums during the working years of your life. This will maximize the amount of cash value you have available for policy loans and withdrawals. It will also maximize the dividend you receive during retirement. Consider buying your policy from a mutual life insurance company that offers dividends to your whole life policy. A mutual life insurance company always works for the benefit of the policyholder and may offer more attractive policy features.