Posted on December 4, 2008

How to Integrate Your Life Insurance Program Into Your Retirement Program

We all need life insurance to protect our families should the unthinkable happen. The most economical way to do this is to purchase an inexpensive term policy. While such a policy provides the necessary death benefit, it doesn’t help with your retirement planning.

There is, however, a type of policy that can. It’s called “universal life.” A universal life policy is structured in two parts: protection and investment. A portion of your premium payments goes into the protection component, which is basically the same as term insurance. The remainder goes into investments such as stocks, bonds, or money markets.

As the investments grow, they should eventually become substantial enough to fully fund the protection portion of the policy for the remainder of its term, which is often to age 100. So unlike term insurance, universal life does not simply expire worthless if you live beyond the end of the term.

You can purchase universal life by paying monthly premiums, which will gradually build up the investment component of the policy, or by making a single lump sum payment, which will fully fund it immediately.

The investment component can be used to complement your other retirement funds. When the value of the investments reaches, or even exceeds, the face value of the insurance policy, you’re not really “insured” any longer; rather, in the event of your demise, your beneficiary will simply be receiving what was already your money. So now, you have a choice. You can simply let the policy “ride,” and take comfort in the fact that the investments it contains will one day go to your beneficiary. But you also have the option of withdrawing some or all of the money while still living. So it’s a “win-win”: you know that if you die relatively young, your family will be protected; but if you live a long life, you’ll be able to tap into the value of the policy when, perhaps, other retirement investments are starting to dwindle.

It is important that you recognize that true universal life is a term policy with an investment component that builds value to the point that eventually the term premiums are paid by the value built. This is significant because some companies sell policies that are actually whole life—never becoming self-funding—and call them “universal life.”

When buying a universal life policy, it is therefore important that you get several quotes, read the fine print, and do your homework. By the way: by law, you have three days to make your final decision on any policy. Use them to read every word, and to make sure you’re getting the policy you really want and need.

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