You may have heard that permanent life insurance can double as a retirement account: pay premiums for years, build cash value, then borrow against it tax-free in retirement. Parts of that are true. Other parts leave out costs and risks. This guide covers both sides so you can judge whether it belongs in your plan.
What cash value is
Permanent policies such as whole life and universal life have a cash value account in addition to the death benefit. Part of your premium goes to insurance costs, and part builds cash value, which can earn dividends or interest depending on the policy type. In an indexed universal life policy, credits are linked to an index within caps and floors.
How people use it in retirement
- Withdrawals. You can generally withdraw up to your basis (the premiums you paid) without income tax in many policies, though this reduces cash value and death benefit.
- Policy loans. You can borrow against cash value. Loans are not generally treated as income when the policy stays in force, but interest accrues and unpaid loans reduce the death benefit.
- Surrender. Cancel the policy and receive the surrender value, possibly with taxable gain.
Read more about loans in policy loans and taxes.
The upsides
- Growth inside the policy is tax-deferred.
- Death benefit generally passes income-tax-free to beneficiaries.
- No contribution limits like those on retirement accounts, though funding limits tied to tax rules apply.
- Access to value without the early-withdrawal rules that apply to retirement accounts.
- Permanent coverage that does not expire.
What agents don't always say
- Costs are real. Insurance charges, administrative fees, and surrender charges reduce growth, especially in early years. Cash value may be low in the first years.
- Illustrations are not guarantees. Projected values depend on assumptions about future credits or dividends.
- Loans can backfire. If a policy with a large loan lapses, the gain can become taxable and the coverage disappears.
- Overfunding triggers rules. A policy funded too heavily can become a modified endowment contract, which changes tax treatment of loans and withdrawals.
- It is a long-term commitment. Policies often take many years to work as intended.
- Other accounts usually come first. Employer matches, 401(k)s, IRAs, and HSAs offer valuable benefits that life insurance does not.
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Request my Retirement Income ReviewWho it might suit
- People with permanent insurance needs who also want a savings component.
- High earners who have maxed out other tax-advantaged accounts.
- Business owners or families with estate planning goals.
- Buyers who can fund the policy for decades and understand the costs.
Who may be better off elsewhere
- Anyone who has not used employer matches and retirement accounts.
- People who may need to stop paying premiums in a few years.
- Those who mainly want inexpensive protection. See term vs. whole life.
- Savers who need simple, flexible access to funds.
Questions to ask
- What is the cash value in years 1, 5, 10, and 20 under guaranteed and non-guaranteed assumptions?
- What are all the charges, and which can change?
- How much premium keeps the policy in force if returns are lower than illustrated?
- What happens if I take a loan and cannot repay it?
- How does this compare with simply investing the same money?
A balanced bottom line
For most people, the sensible order is to capture employer matches, fund retirement accounts and an HSA if eligible, and build an emergency fund before considering a cash value policy for retirement purposes. For those who have done all that and also need permanent coverage, cash value life insurance can be one of several tools. It can look appealing in a sales illustration, so judge it by the guaranteed numbers, the costs, and how well it still works if credits come in lower than projected.
Keep the policy healthy
If you do own one, review it annually. Ask the insurer for an in-force illustration, check that the cash value is tracking the projection, and adjust premiums early if it is falling behind. Small adjustments made early are far easier than rescue attempts late in life.
How we help
We are an independent agency and we show cash value policies from multiple carriers with conservative as well as optimistic illustrations. We do not give tax or investment advice, so ask your tax professional how it fits your plan.
Availability and rules vary by state
Life insurance and annuity products, rates, riders and consumer protections differ by state, and a given product may not be available in every state. Honorbrook is licensed in the 11 states below; which products we can offer you depends on what carriers sell in your state. Each state’s insurance regulator can verify an agent’s license and answer consumer questions.
- Virginia: Virginia Bureau of Insurance
- Maryland: Maryland Insurance Administration
- North Carolina: North Carolina Department of Insurance
- South Carolina: South Carolina Department of Insurance
- Georgia: Georgia Office of Insurance and Safety Fire Commissioner
- Alabama: Alabama Department of Insurance
- Louisiana: Louisiana Department of Insurance
- Texas: Texas Department of Insurance
- Michigan: Michigan Department of Insurance and Financial Services
- Indiana: Indiana Department of Insurance
- West Virginia: West Virginia Offices of the Insurance Commissioner
This article is general education, not tax, legal, investment or insurance advice. Indexed and cash value life insurance is not a direct market investment. Credited interest depends on the insurer’s caps, participation rates and spreads, which can change; policy charges, fees and surrender charges apply, loans and withdrawals can reduce the death benefit and may be taxable, and guarantees depend on the issuing insurer’s claims-paying ability. Suitability depends on your situation; consult a qualified tax professional before acting.