Key takeaways

  • Life insurance’s primary role in retirement planning is protection: the death benefit helps replace lost income and support spouses, partners, and heirs, but it can also help fund retirement.

  • Certain policies, especially whole life, include a cash value component that grows tax‑deferred, and can be accessed via withdrawals or policy loans to supplement other retirement income sources.

  • Whole life for retirement offers lifelong coverage, a guaranteed death benefit, and cash value growth insulated from market volatility, but cash value alone is unlikely to fully fund retirement.

  • Term life brings lower premiums and straightforward death benefit protection during working years, freeing up more cash for 401(k)s, Individual Retirement Accounts (IRAs), or other investments, but coverage ends at term and has no cash value.

  • Life insurance should generally be a supplemental retirement asset layered onto core vehicles like employer plans and IRAs, not the primary engine of retirement income.

How life insurance works

As you probably know, life insurance is an insurance product that pays out a guaranteed sum called a death benefit to beneficiaries when the insured individual passes away.2 For the most part, life insurance policies are designed to help protect families and dependents from financial stress and income loss when the insured individual passes away unexpectedly, especially during their working years.

The two most popular types of life insurance policies include term life and whole life. Both provide death benefit protection which can extend into your retirement years; but whole life has some important added features that can make it an important part of your retirement strategy.

Term life versus whole life

Term life insurance

Term life insurance covers the insured for a specific number of years — 10, 20, and 30 years are common policy lengths. The policy pays out a death benefit to beneficiaries if the insured passes away while the policy is in effect, but protection only lasts until the end of the term; if you want to extend coverage you’ll typically have to apply for a new policy with much higher premiums, especially if you are nearing retirement. And if your health has taken a turn for the worse, you may not be approved for coverage at all. However, for younger, healthier applicants, term coverage is typically the most cost-effective type of coverage, because protection isn’t permanent and the policy doesn’t accumulate any cash value.

Whole life insurance

A whole life insurance policy is a permanent life insurance policy which means that it is designed to cover the insured for life — even if they live past 100. With permanent insurance — including universal life and variable universal life policies — a death benefit is paid out to beneficiaries whenever the insured passes away, even if the policy has been in effect for 50, 60, or 70 years after the policy came into effect.

A whole life policy is typically more expensive than a term life policy. However — in addition to lasting a lifetime — it also includes a cash value component.3 With a cash value policy, a portion of the premiums are set aside in a cash account where funds can grow tax-deferred. Some people even use life insurance for added tax-advantaged savings when other retirement accounts are maxed out. After a certain amount of time (which varies depending on the life insurance company and specific policy) all or a portion of the cash value can be accessed — while the policyholder is still alive.4 That can offer unique tax and retirement-planning benefits during later years.

How can life insurance be used in your retirement strategy?

Retirement and estate planning strategies involve a lot of moving parts. You need to save for your own living expenses during retirement — but you also want to help ensure that your loved ones are financially protected once you pass away, especially for couples with one spouse who is the primary source of income. How can a life insurance policy fit into this picture?

Whole life insurance can be an important retirement asset

When it comes to retirement, whole life can provide two main benefits:

  • The death benefit can be used to support your beneficiaries after your death. This can be crucial for helping support a spouse or partner, putting kids or grandkids through college, and more.

  • The cash value component becomes an asset that can be accessed the through withdrawals, or even as loans against the life insurance policy. These funds are generally tax-free up to your cost basis, as long as the policy remains active. This flexibility can help preserve retirement assets while avoiding having to pull money out of the policy entirely, or later, to help supplement retirement income.

That said, the accumulated funds available from a whole life policy will probably not be sufficient to pay all your living expenses in retirement. Instead, it is best used to supplement other sources of savings — like your IRA or 401(k).

Pros of whole life insurance for retirement

  • Covers you for life

  • Provides a death benefit to support your beneficiaries after you pass

  • Accumulates cash value in a tax-deferred manner

  • Cash value is insulated from market volatility (unlike investments like stocks)

  • You can withdraw from the cash value to help pay for retirement expenses

  • Some policies offer chronic illness or long-term care riders

Cons of whole life insurance for retirement

  • Monthly premiums are higher than term life

  • Cash value probably won't be adequate to cover retirement expenses fully

Term life insurance can also be useful in retirement

There are two main benefits to term life as you approach retirement:

  • It provides a death benefit to your dependents if you pass away during the term. That means protection can last many years past retirement, especially with a 20- or 30-year policy.

  • The monthly premiums are lower than whole life, so you may have additional funds to apply to other retirement investments or savings accounts

Again, term life does not have any sort of cash value accumulation — so it cannot be used as a retirement savings vehicle in and of itself. The key benefit is that by choosing term life rather than whole life, you may be able to save on your premiums and have extra funds to use for other forms of retirement savings.

Pros of term life insurance for retirement

  • Cost-effective monthly premiums, if purchased when you are younger and healthier

  • Provides a death benefit for life of the term that can last well into retirement

Cons of term life insurance for retirement

  • No cash value component

  • Only provides coverage until the end of the term

Alternatives to using life insurance in retirement strategies

Whether or not you use it as part of a retirement strategy, life insurance is worth considering as a way to help protect your dependents should you pass away. However, when it comes specifically to saving for retirement, life insurance policies may not be the best fit for your needs. Here are some alternatives worth considering.

Annuities

Annuities are financial products that provide a guaranteed stream of income in retirement.5 When you purchase an annuity — either with a lump sum payment or monthly premiums — your investment will grow on a tax-deferred basis. After, you can convert the principal into a stream of regular income payments. That income can last for a specific period of time (say, 10 or 20 years) or for the rest of your life. The tax treatment depends on whether the annuity is qualified (paid for with pre-tax dollars) or nonqualified (after-tax dollars): Distributions from a qualified annuity are generally taxed as ordinary income; in a nonqualified annuity, only on the earnings portion is taxable as ordinary income, with after‑tax principal returned tax‑free.

Annuities are a popular investment option that can provide guaranteed income and stability in retirement. They may be most appropriate for those who are willing to accept a relatively low rate of return in exchange for the financial confidence that comes with a stream income you can count on.

Retirement accounts

Retirement accounts — including IRAs and 401(k)s — are specifically designed to help you save for retirement. They offer tax benefits that are considered to be a key component of any retirement saving strategy.

With retirement accounts, you contribute money in your working years, either through paycheck deductions or direct contributions. You can enjoy a variety of tax benefits, including immediate tax advantages (in the case of traditional IRAs and 401(k)s, income tax-free withdrawals in retirement (in the case of a Roth IRA), and tax-deferred growth of your contributions until retirement. When you stop working, you may be able to start drawing money from your retirement account to pay for living expenses. Keep in mind that withdrawals may be subject to taxes or penalties, depending on your age and plan details.

If you have a 401(k) through your employer, that can be a great place to start. Check to see if your workplace offers employer matching. If so, your employer may contribute money to match your own contributions each year. If you don’t have a workplace plan — or would like to supplement a workplace plan with an individual account — consider opening an IRA with a financial institution or brokerage.

Guardian can help

As you’re trying to decide whether life insurance is right for your retirement strategy, there may be financial issues and questions that you can’t answer on your own. If you don’t currently have professional to speak with, we can help. A Guardian financial advisor will listen to your needs, help define your goals, and work with you to make the right decisions for your situation. Here’s how to find someone near you:

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Frequently asked questions about life insurance and retirement

Life insurance should not be used as your primary retirement asset. It can definitely play a role in your overall retirement strategy. Still, in most cases, it should be used to help provide a source of supplemental retirement income — with the bulk of retirement income coming from other types of retirement or investment accounts.

The primary function of life insurance is to protect your beneficiaries in the event of your passing. That said, certain types of life insurance — including whole life — do offer a cash value component. A portion of your monthly premium can grow over time in a tax-deferred manner. At a certain point, you may be able to withdraw from the account or take loans against its value, so you’re less likely to sell other retirement investments at a loss during a downturn. Or, keep letting your cash value grow, and it can become an asset that can ultimately supplement other forms of retirement savings.

This material is intended for general use. By providing this content The Guardian Life Insurance Company of America and your financial representative are not undertaking to provide advice or make a recommendation for a specific individual or situation, or to otherwise act in a fiduciary capacity.

“Financial Advisor”/“Advisor” is used generally to describe insurance/annuity and investment sales and advisory professionals who may hold varied licensing as insurance agents, registered representatives of broker-dealers, and investment advisory representatives (IAR) of registered investment advisors, respectively. Only those representatives who use Advisor in their title or otherwise disclose their status and meet the necessary licensing or registration requirements provide investment advisory services.

1 Guardian, its subsidiaries, agents and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation.

2 All life insurance policy guarantees are subject to the timely payment of all required premiums and the claims-paying ability of the issuing insurance company. Policy loans and withdrawals affect the guarantees by reducing the policy’s death benefit and cash values.

3 Some whole life policies do not have cash values in the first two years of the policy and don’t pay a dividend until the policy’s third year. Talk to your financial representative and refer to your individual whole life policy illustration for more information.

4 Policy benefits are reduced by any outstanding loan or loan interest and/or withdrawals. Dividends, if any, are affected by policy loans and loan interest. Withdrawals above the cost basis may result in taxable ordinary income. If the policy lapses, or is surrendered, any outstanding loans considered gain in the policy may be subject to ordinary income taxes. If the policy is a Modified Endowment Contract (MEC), loans are treated like withdrawals, but as gain first, subject to ordinary income taxes. If the policy owner is under 59 ½, any taxable withdrawal may also be subject to a 10% federal tax penalty.

5 Annuity guarantees are backed by the strength and claims-paying ability of the issuing insurance company.

How to Use Life Insurance in Your Retirement Strategy | Guardian