Retirement Planning through Life Insurance

Since you plan on paying money into a life insurance policy anyway, you might do well to look ahead and create a policy than can supplement or entirely fund your retirement.

Cash value life insurance policies build equity over time.  If you plan in advance and manage your policy diligently, you can prepare a nest egg though life insurance.

Building equity

Cash value life insurance policies (which includes all permanent life insurance) contain a component called "cash value," which accumulates interest tax-free.  Your premium payments also augment your policy's cash value.  The rate at which interest and premiums enlarge your cash value depends on the type of cash value life insurance policy that you choose.  (see "Cash value" for details)

When to access equity

Really, you can turn your cash value into cash (in whole or in part) at any time.  Unless you're in a financial pinch, though, it makes sense to leave it to accrue interest for as long as you require life insurance coverage.

When children have moved away, debts are paid, and your spouse no longer depends on your salary, then is the time to cash in.  If you're not ready to retire yet, you can always re-invest the proceeds from cashing in your life insurance policy.

How to access equity

Here are a few options that are well-suited to retirement planning:

Surrender — The simplest option available is to terminate your policy and walk away with its cash value.

Settlement — You can usually get a larger return than surrender offers by selling your policy.

Deferred compensation plans — Essentially, the same as surrender, but your employer funds the policy for you and administrates your retirement fund.  This option presents additional tax advantages.