What life insurance can (and can’t) do for a retirement plan

There is no silver bullet when it comes to retirement planning. My most successful retirement clients — wealthy or not — knew that a comfortable retirement would be built around a combination of financial and emotional benefits.

Understanding the yin and yang of these complementary components is crucial for an agent to present the right life insurance solution. Let’s look at five needs that this product can address. And at the end, we have some not-so-subtle reminders of what not to do.

First, let’s tackle the fun stuff of how life insurance can add bulk to a well-rounded retirement plan.

1. Tax-advantaged growth

This is a compelling story for life insurance. Permanent life policies, such as whole life or universal life, accumulate cash value over time. This growth is not taxed while it remains in the policy.

The policy’s cash value can be accessed through policy loans or withdrawals. This provides a source of income in retirement that is generally not subject to income taxes — unlike withdrawals from 401(k)s or traditional individual retirement accounts. Although loans must eventually be repaid, this tax-deferral and flexibility can make life insurance a valuable addition to a diversified retirement portfolio.

2. Supplement to Social Security

Social Security provides a foundation for retirement income, but it is rarely sufficient on its own, especially for high-net-worth individuals looking to maintain their pre-retirement lifestyle. Life insurance can act as a supplemental income source in retirement.

In addition to the death benefit, some permanent life policies offer riders that pay out during the policyholder's lifetime, such as accelerated death benefits for chronic illness or critical illness.

For individuals in higher income brackets, some life products offer tax-free cash value loans or withdrawals that don’t impact Social Security or other retirement benefits.

3. Estate planning and wealth transfer

This is critically important to your high-net-worth individuals. Upon death, life insurance death benefits are generally paid out tax-free, making them an ideal tool for wealth transfer.

Life insurance can help preserve inheritances by providing cash to pay for estate taxes. In addition, the death benefit can be structured into a trust, offering further control over how wealth is distributed after the policyholder’s passing.

4. Asset protection

For affluent individuals who own businesses or substantial assets, life insurance can provide an extra layer of protection. In many jurisdictions, life insurance proceeds — whether the cash value or death benefit — are shielded from creditors. This makes life insurance a valuable tool in protecting wealth from lawsuits or financial difficulties.

Because life policies are generally not subject to market volatility in the same way that other investments may be, they offer a stable asset that can be relied on in uncertain times. For individuals looking to safeguard a portion of their wealth from economic fluctuations, life insurance can be a secure option that complements other retirement assets.

5. Long-term care and chronic illness planning

This issue is a big one. Many life policies now offer riders for long-term care or chronic illness, allowing policyholders to access part of their death benefit to cover these expenses.

These riders can often provide more flexibility than traditional long-term care insurance. Life insurance riders typically give policyholders the ability to use their life insurance benefits in ways that suit their specific needs.

Common mistakes life insurance agents make in retirement planning

Now, let’s look at some common mistakes agents make when connecting life insurance with retirement planning:

• Overemphasizing investment potential. Life insurance is not a get-rich-quick strategy. Agents should position it as a tax-efficient tool for legacy planning and financial security, not as a primary investment strategy.
• Ignoring costs and complexity. Whole life and universal life products sometimes come with hefty premiums and other costs, which can reduce cash value growth. Make sure clients understand both sides of the coin.
• Not aligning with broader financial goals. It’s not uncommon to find life insurance treated as a stand-alone product without considering the client’s overall financial plan.
• Overlooking loan impact on cash value and death benefit. Clients often don’t fully understand the erosive impact outstanding loans can have on policy value.
• Misunderstanding client’s risk tolerance. Life insurance may not meet the needs of clients looking for aggressive growth.

Life insurance is a flexible product and, for the right clients, it hits a bullseye when it comes to protecting their loved ones and assets.

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Drew Gurley is a licensed life insurance expert with nearly 15 years of experience. During his career as both a licensed life insurance agent and industry executive he has helped thousands of clients with their life insurance needs through his work at Redbird Advisors and Senior Market Advisors.