Someone once asked me “What does life insurance have to do with retirement?”. It was a good question, since the link between the two is not blatantly obvious to most. For those who are familiar with financial planning, the connection between life insurance and retirement planning is all too apparent. Life insurance and retirement planning are related in the more than a couple ways.
Forced savings for retirement
One of the benefits of cash-value life insurance (that term-insurance apologists fail to recognise) is forced savings. The reality is that financially indisciplined people would not save much or “invest the difference” without cash-value life insurance plans. The savings portfolio helps those folks put aside money that can be used for retirement.
Contributions towards your retirement fund
Good cash-value life insurance plans that have been in existence for more than 15 years would accumulate a significant sum by the time you reach your retirement age. You can use these funds to augment your accumulated retirement savings or use the interest or dividends to contribute to your income stream.
How much you have to save towards retirement
You would not want to pay so much for your life insurance that you reduce your options for retirement planning. When doing retirement planning, you would normally determine what percentage of your income that you could save. A life insurance premium could decrease this amount. On the other hand, your retirement planning commitments can reduce the amount you have to finance a life insurance plan. This is why it is a good option to seek low-cost insurance or term insurance for short and medium-term life insurance needs.
Hybrid retirement plans with some aspect of life insurance
Some retirement plans offer life insurance. As part of your financial planning, you may decide that it creates higher value to choose such a plan than to seek retirement instruments and life insurance separately.
Retirement planning for couples
For those who are married, the retirement status of both spouses is critical. If one spouse is not-working or has a low pension, life insurance may be a way of ensuring that the other spouse can have a replacement income in the event of death of the earning spouse. Life insurance protects your loved ones who may depend on you during retirement as well.
Life insurance with optional supplementary benefits
Some life insurance plans are embedded with long-term health care and critical illness as supplementary benefits that could extend into retirement. These “riders” usually have a reduced cost than stand-alone plans and could be used to offset the medical insurance aspect that is vital to retirement planning.
How much insurance to keep after retirement
When you retire, you should normally reassess your life insurance portfolio. Retirement planning may influence the type of life insurance you would buy. If you are using life insurance to protect your spouse who may be wholly or partially dependent on your income, you may choose permanent life insurance. If you figure that your mortgage needs would be taken care of and you’d have financed your children’s education by retirement, your choice may be term insurance.
The link between life insurance and retirement planning is a strong one. This is because retirement planning is merely an extension of financial planning. It is true that life insurance is a vital cog in the wheel of most people’s financial plan. Once you understand the link between life insurance and retirement planning, it would be easier to plan for one in terms of the other.