Ask the Piggy Bank: Life Insurance as Retirement Income?
September 26, 2008 by Miranda Marquit
Filed under Finance
We’ll take a little break from all bailout all the time to answer a reader question:
Three years ago my husband and I were talked into purchasing permanent life insurance policies as a means to eventually supplement our retirement. This was in addition to my husband’s 401k but at the time was my only contribution to retirement of any kind. We are both 33 now and my question is was this a really bad decision? What is your opinion of using your cash surrender value for retirement? Should we get out while we can and put the money in our IRA or wait until the cash value is greater than our premiums paid (5 years from now)?
First of all, I don’t like life insurance as a form of retirement income. Especially with cash rates what they are right now. Inflation is likely to eat up any returns. My husband and I have small universal life insurance policies to supplement the term life (because you do need life insurance to secure the finances of loved ones), but we don’t consider them sources of income. We plan to use the cash value on a small trip to celebrate retirement.
I’m actually inclined to say “cut your losses” and get out. If you are having trouble affording the premiums, then the current economy could make things tight. On top of that, if you use the money to beef up your tax-deferred retirement accounts now, you can get more bang for your buck as the market recovers in the coming decade. In the long run, that will accumulate better than putting up premiums for cash value for another five years.
Do any readers have any suggestions or thoughts on this?
I agree that the questioner should get out of the whole life policy. There are some new variable annuity products with living benefits that you can look at and run the numbers but be very skeptical of any insurance based product. In most cases the costs are excessive for what you are getting.
Thanks for your thoughts, ToughMoneyLove! Relying on insurance for any sort of regular income is chancy at best. It is best used for what it was originally designed for: protecting your loved ones’ financial interests if you should die.
Life insurance is great for retirement if you know how to use it! Meaning you overfund a permanent policy and let it grow for say 20-30 years…this can help with retirment income….please contact a QUALIFIED insurance professional or google the subject….please only advise on what YOU know!!!!