Life Insurance as a Retirement Supplement?

The life insurance industry has tried for decades to sell the idea that life insurance policies are a viable alternative investment for retirement funding. Some advertise this concept as an alternative to a Roth IRA without the funding limitations. This analogy is made due to the similarities of: after tax contributions, tax deferred accumulation, tax free distributions. The tax advantages of life insurance contracts as an investments are: tax deferred accumulations, "first in - first out" distribution of basis, and death benefits paid income tax free.

However, life insurance is an insurance product first and by design, any accumulation value is meant to offset future mortality and expense (M & E) charges. Therefore, attempts to make permanent life insurance contracts perform as competitive investments must be carefully analyzed. The Achilles heal of the life insurance contract, as an investment, is the M & E. Where most investments have investment expenses, the life contract has the added expense of mortality costs and premium tax. In addition, the marketing and administration expenses of traditional life contracts are typically higher than those associated with a competitive investment. For these reasons, life insurance as a retirement funding vehicle has experienced moderate success within the insurance and investment industries.

Ultimately the distribution from a life insurance contract to supplement retirement relies on the actual yield credited to the account value over the life of the contract. Furthermore, it is important to understand that income generated from any life insurance policy may or may not be free of income tax. The two basic options to supplement retirement with a life policy are to withdrawal the basis (premiums paid) with no tax consequence, and/or to take out policy loans. Interest due from loans accrues in the policy and the net death benefit will be the net of the loans and accrued interest. However, should the policy lapse, the loans plus accrued interest would be treated as income and subject to ordinary income tax.

Like most successful investments, this investment requires management by a knowledgeable owner and qualified professionals. In this case, an insurance professional and a qualified investment advisor should be utilized for the life of the contract. If careful analysis indicates that the life insurance investment performs as well or better than the alternative investment, it should be seriously considered, because it is the only investment that meets the original objective in the event of the investor's untimely death. Life insurance guarantees that the capital objective is available to the survivors.