Using Whole Life Insurance for Retirement? Read the Fine Print

By now you likely heard of whole life insurance. If not, you are in luck. This is where you really have to read the fine print. If you ever run into an insurance advisor, producer, agent, or associate, just know that they are insurance sellers. They make a commission on the sale. That should be warning enough. Worst yet, they really don’t make that much annually (ref. ). This makes them very desperate which forces them to stretch the truth on the benefits of their services or products.

Specifically, if you want to protect your hard-earned dollars, pay attention to the sleight of hand.

Keep an eye out for the whole life insurance prospectus. Remember the rule of thumb, if they are asking you to sign and initial here, here, and here; you might need to read and understand what that document is saying.

A prospectus is a legally binding document that contains the product’s investment objectives, risks, charges, and expenses. If the numbers don’t make sense, pause and reach out to your certified financial professional. If you don’t know anyone, take a week or at least a weekend to get back to the whole life insurance agent (or producer). If they try to pressure you into a sale, remember where there is smoke, there is likely a financial fire. Please read the prospectus carefully before you invest or send any money.

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Why do people consider permanent or whole life insurance?

Let’s start off simple. The seller looks knowledgeable and successful. That’s merely part of the strategy. They follow up the attire with a heavy dose of personal fear mixed in with the potential of somehow beating the system. The product is always presented as a big secret that only the few and most exclusive know about. Why? Because you won’t be able to verify the claims.

Told you it was simple.

The phrase “life insurance” ends up paired with generational wealth, leaving a financial legacy and/or protecting your family in case you pass away unexpectedly. The new part of the scheme to pepper in “living benefits” and flexibility in times of financial turmoil. Wait, why are rich people in financial turmoil? Exactly, no need to ask smart questions.

Permanent life insurance is also considered a way for you to achieve your goals and set yourself, your loved ones, or your business up for success today. The idea is that a permanent policy can help you:

Effectively live more for today

Unlike time-based and cheaply priced term insurance, permanent life insurance requires an expensive monthly payment for your entire life. The company uses you as a form of reoccurring payments and relies on using you for income-driven investment cash flow earning over 10%. The goal here is to sell you on the idea that you are winning. For example, you may have access to your money through withdrawals and loans throughout your life (generally tax-free). However, you already paid taxes on the money before you made the deposit. The company will keep making money.

Loans and withdrawals reduce the policy’s cash value and death benefit, may cause certain policy benefits or riders to become unavailable, and may increase the chance the policy may lapse. Loans taken will be free of current income tax as long as the policy remains in effect until the insured’s death, does not lapse, and is not a MEC. Please note outstanding loans accrue interest.

Keep more. Permanent life insurance allows you to keep more of your money because it provides the potential for tax-deferred growth and gives you the ability to pass along money through the death benefit — generally with no income taxes.

Build more. Unlike term insurance, permanent life insurance generally provides the option for cash value that can increase every year in a tax-deferred way — in turn helping you grow your assets. With a permanent life policy, you have a wide range of investment choices and more flexibility to invest how you want, depending on your preferences for market stability and growth potential.

Variable universal life does contain investment risk including the possibility of loss of principal invested. Under current federal tax rules, you generally may take tax-free partial withdrawals under a life insurance policy that is not a modified endowment contract (MEC), up to your basis in the contract. Additional amounts are includible in income. The IRS places a limit on how much money can go into life insurance premiums for the policy and how quickly such premiums can be paid in order for the policy to retain all of its tax benefits. If certain limits are exceeded, a MEC results. MEC policyholders may be subject to taxes on distributions on an income-first basis, that is, to the extent there is gain in their policies, and penalties on any taxable amount if they are not age 59½ or older. Loans taken will be free of current income tax as long as the policy remains in effect until the insured’s death, does not lapse, and is not a MEC. Please note outstanding loans accrue interest. Income tax-free treatment also assumes the loan will eventually be satisfied from income tax-free death benefit proceeds. In addition, withdrawals, policy loans, and any accrued interest may cause your policy to lapse even if you are in a period of coverage under the No-Lapse Guarantee Rider. Speak to your financial professional before taking any withdrawals or policy loans.

If you purchase permanent life insurance early enough and fund it correctly, you may be able to use it in one of the following ways in retirement:

Pull out the cash value for unexpected or planned expenses. If you fund your life insurance policy correctly, you can access your cash value for anything from paying for a child’s college education or wedding to business expenses — without generally having to worry about the burden of taxes.1
Take generally tax-free distributions to help supplement your retirement income. You can also design your life insurance policy so you can take withdrawals to help supplement the other income you receive during retirement. For example, if your other investments are down and you don’t want to lock in market losses, you can use the cash value in your life insurance policy to provide retirement income.
- Please remember, that withdrawals and loans from your life insurance policy will reduce the cash value and face amount of your policy, you may need to fund higher premiums in later years to keep the policy from lapsing.
- A variable universal life insurance contract is a contract with the primary purpose of providing a death benefit. It is also a long-term financial investment that can allow the potential accumulation of assets through customized, professionally managed investment portfolios. These portfolios are closely managed in order to satisfy stated investment objectives. There are fees and charges associated with variable life insurance contracts including mortality and risk charges, front-end loads, administrative fees, investment management fees, surrender charges, and charges for optional riders. Fees and charges associated with variable life insurance include a front-end load, mortality, and expense risk charges, cost of insurance charges, surrender charges, administrative fees, investment management fees, and charges for optional benefits. Contact a financial professional for costs and complete details of coverage.
Pay for long-term care expenses, if you have the rider. Some permanent life insurance policies offer long-term care riders, which, when added to a life insurance policy for an additional fee, can help provide the flexibility to adapt your policy to your needs, offering a relatively affordable and effective way to help pay for potential long-term care costs.

While there are times when term life insurance is an appropriate choice, a permanent policy may be a smart addition to your financial plan if you’d like more ways to help protect your family, minimize your taxes, and find alternative ways to invest and potentially grow your money. Talk to a financial professional to see if a life insurance policy might make a good addition to your overall portfolio.