Relation Between Life Insurance and Retirement Plans

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  • Post last modified:December 24, 2018

Life insurance is used to protect families in case the breadwinners die during their working years and is closely connected to retirement planning.

Many people don’t truly understand the importance of life insurance and if you’re one of them, don’t worry as you are among the millions of people who don’t have the slightest idea about the relationship between life insurance and retirement plans.

With life insurance, many people reach their long-term goals, achieve their dreams and recover from financial risks and unexpected costs. Financial situations change when least expected and it could be overwhelming to think about financial protection and retirement.

It is sad to know that people don’t appreciate the benefits and value life insurance could have as part of the retirement plan and when wisely chosen, life insurance has many benefits such as providing peace of mind to your family, provision of tax-free cash flow, protection of your income, and plays a huge part in the protection of taxes.

The Relation Between Life Insurance and Retirement Plans

life insurance is important after retirementIf properly incorporated in a retirement income plan, life insurance has a lot to offer besides death benefit protection.

For instance, it protects your family during your working years when children are financially dependent on you.

In addition, it helps you achieve different retirement goals such as meeting late-retirement objectives, providing income in retirement, and filling gaps in retirement saving, for example as a result of the loss of a job or premature death.

In order to have a clear understanding of how life insurance relates to retirement plans, we will have a look at different types of insurance plans that could excellently meet your retirement planning needs.

Life Insurance Plans to Consider in Your Retirement Plan

  • Whole Life Plan
  • Unit Linked Insurance Plan (ULIP)
  • Retirement Plans
  • Endowment Plans

Unit Linked Insurance Plan (ULIP)

Insurance and investment can be combined together to form a unit linked insurance plan. In this case, the insurance company invests part of your premium in various funds such as market funds, equities, bonds, debts, or hybrid funds depending on how much you can take risks with your investments while the other part of the premium is used to provide life cover.

Whole Life Insurance

Given that the life expectancy of a human is estimated to be 70-90, a whole life insurance policy will cover you for a lifetime or up to the age of 100 years.

However, human beings cannot control their own lives and cannot decide on whether to live or die. Therefore, in any case, the life insured passes away before the maturity of the investment, the amount assured plus the bonuses if any is paid to their dependent.

Luckily, if the life insured survives to live for 100 years, the endowment coverage will already be mature and it will be paid to the life insured.

Whole life insurance comes with an advantage because once the premium payment tenure ends; you can make a partial withdrawal of part of your investment or regular payouts which could help after retirement.

Endowment Plan

Endowment plan is perfect for anyone looking for long-term savings. With this plan, part of your premiums provides life cover meaning that you’ll be financially secured all your life and even after your demise, your dependent will not suffer a lot.

If the life assured will survive through the policy term to maturity, the insurance company will give a maturity of survival benefit.

Nevertheless, if the life assured dies before the tenure of the endowment plan, the insurance company will then pay the death benefit to the dependent. This plan gives you an opportunity to earn extra bonuses which are paid to you when the plan ends or to the dependent under death claim.

Retirement Plan

The retirement plan is the best plan that excellently meets all your retirement needs. This plan gives you an opportunity to silently and accurately develop a retirement plan in a well-developed, secure and pocket-friendly way.

This means that you won’t have to worry about the financial constraints associated with retirement, and you’ll retire gracefully and happily. In order for you to understand a retirement plan, you must familiarize yourself with the two phases it’s associated with.

  1. Accumulation phase – In this phase, the insurance company requires you to pay premiums all through the policy tenure of the insurance plan. The premium is then collected and invested on your behalf by the insurance company in securities and with time, the investment grows and gives revenue for you
  2. Annuity phase – This is the second phase of a retirement plan which is distinguished by the growth of your investment which enables you to start receiving returns. As the insurance plan mature or upon retirement, you’ll start to get regular income.

Most people are eligible for the retirement plan if they are between the ages of 50 to 70 years. During the annuity phase, you are allowed to withdraw as much as 33% of your accumulated funds at one time while the rest is used to purchase an annuity plan.

It’s also in this phase where you receive regular pension every month, in four months, in six months or once a year depending on the annuity and your preferred mode. The pension you receive is a great assurance of constant cash flow after your retirement.

The Best Strategy to Use Life Insurance as Part of a Retirement Plan

Protect Your Income in Retirement

It goes without saying that any family should plan for their financial future if they don’t want to struggle on retirement. This means that they should have life insurance which is a foundation of a solid retirement plan and if your family is dependent on your retirement income, it will be financially secured.

As a result of the demise of a spouse in retirement, the life of the other spouse is negatively affected and they struggle a lot to meet their daily income needs. Besides, they don’t benefit from one of the two social security benefits they were receiving when the two spouses were alive.

However, life insurance is a life saver as it ensures that the spouse and children left behind have a constant flow of income because it replaces other retirement income or the lost social security benefits. This means that the spouse will have enough income to maintain their current living standard throughout retirement.

Manage Your Retirement Savings

Many people are not able to make financial arrangements when about to retire and this makes them struggle financially as they age. 10 years prior to retiring, they find out that they don’t have enough retirement savings and if one spouse dies during that period, the other spouse experiences financial challenges.

On retirement, it goes without saying that a person is getting old and that’s the best time to enjoy life to the fullest and not to worry about where to get money for your upkeep.

Therefore, the couple is supposed to buy a 10 to 15 years life insurance policy before retiring as this will protect their retirement savings plan.

Generally, the life insurance policy is cheap and will not be a burden to you. If you want to enjoy your retirement, it’s recommendable to get a convertible term life insurance policy as it will offer protection to your insurability as a result of your health change.

Make Life Insurance Part of Your Financial Plan

Life insurance guarantees that your dependents such as children and your spouse will be looked after even after your death. This means that when you consider life insurance as part of your insurance plan, the future of your family is secured.

In addition, the payouts you get from the insurance plan can do miracles in paying off debts and loans, for instance, car and mortgage payments.

Therefore, the people you leave behind will not struggle financially as they can use the money to pay for their school fees because they can’t depend on your income anymore.

If your partner is a housewife, for instance, they need money for daily upkeep and if you pass away before retirement, life insurance ensures that your family still remains financially stable.

Invest in Long-term Disability Insurance

Life is very unpredictable and no one knows what will happen to them the next minute. For instance, you might be physically fit and healthy in one minute but physically unfit the next minute.

With that in mind, avoid depending on your social security for your disability benefits. If you sustain a serious injury that keeps you medically unfit to work, it could be difficult to qualify for benefits from social security and if you’re lucky enough to qualify, the money you get might not be enough for your family upkeep.

Therefore, it’s always advisable to ensure that your retirement plan has long-term disability insurance and you can choose either own occupation coverage or any occupation coverage.

Many retirement income experts recommend going for own occupation coverage as it gives a comprehensive coverage and in case you can’t work in your field, this coverage replaces the income you’d have earned in your position.

If you don’t have a family to support, applying for long-term disability insurance is a great idea as it ensures you get enough income even when you aren’t able to work as well as when you retire.

Allow Your Term Life Insurance Policy to Expire

Many people consider buying a term life insurance policy to secure the future of their children. However, this policy expires as soon as your children grow older and in this case, the insurance company advises you to renew it by replacing it with another policy.

If you want to be on the safe side, don’t renew it but let it expire and save the money you’d have used on that policy. This way, your partner will be in a good position to use your social security benefits, pension benefits, and retirement benefits to cater for all their financial needs.

Let the Cash Value Become Tax-deferred

If you decide to buy permanent life insurance or whole life insurance, it will produce an outstanding cash value over time which is tax-deferred as you receive tax planning and retirement benefit.

According to the Internal Revenue Service (IRS), policy payments producing cash value are regarded as returns of the premiums you pay before the policy tenure ends. And when the payment exceeds the total premium paid, you pay taxes.

If you want to be on the safe side and remain financially stable, avoid paying taxes to the IRS until the tenure of your insurance policy ends. Instead, allow the cash value to continue growing and cancel the insurance policy when you start receiving tax-free income.

Pay Premium with Dividends

As stated, whole life insurance policy covers you up to 100 years and ensures that your dependents are financially secure. If you want to have a happy retirement, use the dividends of the coverage in the payment of the premiums and you’ll have a constant flow of cash.

In addition, those dividends will give a tax-deferred growth and it will be good enough to pay your premiums.

Take Money against the Cash Value

Upon demise, your dependents receive the money and not cash value. Therefore, it is recommendable to use the cash value when you’re alive.

For instance, you can borrow money against your cash value and repay it later. This ensures that you’re not short of cash and you’ll have a steady flow of income even after retirement.

Linda Chavez

I'm a burial & senior life insurance expert, independent agent, Founder & CEO of Seniors Life Insurance Finder. I have been working in this sector since 2004 and established my own company in 2014. I have a team of seven members, and we are trying hard to share the knowledge we've gathered. We know how difficult often it is to find an affordable policy. Hence, we are doing our best to help you.