Insurance as Part of Your Financial Plan

Contrary to what some in the insurance industry would have you believe, I do not believe insurance products, in general, should be considered part of your retirement investment portfolio. Most life insurance, in all its various flavors (term, whole, variable and universal), comes into play after your death. Considering I plan to be alive during my retirement, life insurance does not really fit into my retirement portfolio, nor the planning.

One insurance product that might be considered part of a retirement plan are annuities (variable, fixed and equity-index). While I am not a huge fan of these products, for some they can serve a role as an option for turning your retirement savings, your nest-egg, into a reliable retirement income stream.

Though life insurance does not fit into my retirement planning, it is a part of my overall financial plan. “How?” you might ask. Before we get to that, as you might imagine, there are lots of different flavors of life insurance (term, whole, universal, variable, universal variable and likely some I am missing) available to consumers.

Term life is the simplest and least expensive type of policy. As the name suggests, it is in effect for a specific time period. It is pure insurance with no cash value account. This type of insurance policy has only one function: to pay a specific lump sum to the person(s) you have designated as the beneficiary upon your death. The death benefit and the policy limit are the same. As an example, a $350,000 policy pays a $350,000 death benefit.

While I won’t get into detailed descriptions of the other types here – there are any number of sites that can give detailed descriptions – in general the other types of life insurance provide both a death benefit and a cash value account. Their premiums are larger than term life premiums because they fund the savings account in addition to buying insurance. These policies are often referred to as cash value policies.

Back to term life. About two years ago I purchased this type of insurance, a 15 year – $350,000 policy, at less than $50 per month. This means that if I should die before the policy expires, February 2029, my beneficiaries will receive the $350,000 — $250,000 to my wife and $50,000 each to my brother and mother.

My current plan calls for our mortgage to be paid off in 11-12 years; hence the reason for a 15 year policy, which extends a little beyond that time.

If I should die before February 2029, the $250,000 is enough to pay off the mortgage today – and of course, the balance will only decrease going forward – ensuring that my wife will not have to touch any of the money in our retirement accounts to deal with the house.

The bottom line? Going into retirement, with or without me around, my wife will be in a position to go into retirement without any debt and a healthy retirement investment portfolio intact. While the term life policy is not part of my retirement plan, it is part of the overall financial plan for my family.


Blogger-in-Chief here at RetirementSavvy and author of Sin City Greed, Cream City Hustle and RENDEZVOUS WITH RETIREMENT: A Guide to Getting Fiscally Fit.


  1. I’m very glad you addressed this topic, James. I can see the benefits to having life insurance (& other insurances) as part of one’s overall financial plan and/or part of one’s retirement plan. Either way it’s massively important.

    As you mentioned, your plan includes considering how your wife will be affected financially by your passing. Without the policy in place she’s left to grieve while having to address bills, debt & all other life’s challenges. As a former victim of identity theft I also firmly believe in legal insurance to help deal with legal issues as they will rear their ugly head in the future (buying/selling a house or vehicle, creating a will/Health Care Directive, etc.). Whether it’s part of one’s financial plan or retirement plan, I believe it wise to realize the important role insurance plays in helping to reduce the cost of those inevitable situations.

    • No doubt that insurance can play a role. Instead of buying blindly however, individuals should clearly have a plan for what role it will play and of course, limit the expense as much as possible. Thanks for stopping by, my friend.

  2. A Google+ reader offers…

    “Depends on the insurance policy. Some are specifically designed as savings policies and the life insurance is a way of generating tax efficiency in the structure. Some of these policies should not, by contrast, be considered insurance policies as the amount of cover is minimal (typically 1%).

    I dislike whole of life insurance as there is no way of telling what the costs or returns are. Better off with a savings policy and separate term assurance.”

    • My reply to the Google+ reader…

      No doubt that taxes should be a consideration with respect to drawing income from various accounts in retirement.

      With respect to saving/investing for retirement, long time horizons should be considered. With that in mind, I did a little research and found that over the last 20 years (1994-2013) the S&P 500 has returned 9%.

      I often suggest people look for low cost (fees < 1%) index funds when funding retirement plans. Therefore, that would have given an individual that had invested over the last 20 years an ~ 8% gain. So here are the questions I would ask of someone advocating investing in an insurance policy vice a low cost index fund via a 401(k), Traditional IRA or Roth IRA. Considering cost/fees, are there insurance policies out there that would provide returns greater than 8%? If not, what would be the likely return of such an insurance policy and are the tax benefits enough to make up for the lower return?

      • The Google+ reader replies…

        “Fair point. Insurance policies in Europe can allow for returns to roll up tax efficiently thereby allowing one to defer tax payment until a more favourable time or negate the payment altogether.

        As tax charges through various means (capital gains, dividend tax etc) can be high, anyway to minimise this is of benefit. Using insurance policies is one such method. The benefit of deferring tax can be huge especially over time. Using your example of 8% returns. $10,000 over 20 years is $46,600 gross. If average tax was 20% i.e. 6.4% net, the same investment would yield $34,500. For the gain of $36,600 to get to the same level would require an effective tax charge of about 33% on the gross figure. The likelihood is one would pay less rather than more tax.

        As for your point on ETFs they have their place as do managed funds. Their use is down to the individual investor concerned. There are also good and bad variations of both.

        Is it possible to get returns greater than 8% p.a. using an insurance policy? Yes. As they can be open architecture and allow investments from a huge selection of investments then there is the option to take more risk to achieve higher returns. One could take lower risk and get lower expected returns with less volatility as well if they wish.”

  3. We also subscribe to the term insurance philosophy and will self insure after retirement.

    • The problem with insurance in my experience is that a lot of families buy it blindly – viewing it as some type of investment – without a clear vision for how it fits into an overall financial plan. Like you, term life serves a specific function for my family and I focus more on traditional investment products (e.g. stocks, mutual funds, etc.) and accounts (e.g. Roth IRA, TSP, etc.) to insure my families’ long-term financial well-being.

  4. Hi James,

    I like your work, your blog, your book, which I just bought ans skimmed quickly. I’ll read it this weekend, on my flight to Chicago.

    I respectfully disagree with your assessment of life insurance. This is a very difficult issue to summarize easily. But, I will quickly try. It is late, and I have early appointments.

    It seems that you may be 47 years old. I’ll assume that your wife is the same age for the moment. You say that you “recently purchased this type of insurance [term], a 15 year – $350,000 [death benefit]. You are now protecting your family (not sure at this point if you have children. I just found you tonight!) in case you pass away (god forbid) before you are 62 (which is my age, BTW.) The likelihood of that happening is around 4%. The life insurance company will make good money from that deal. (And that is ok – fine with me.)

    Permanent life insurance *guarantees* that your estate will receive the death benefit. Guaranteed.

    With that guaranteed death benefit in place, you will feel less fearful to spend your other assets, and will avoid hoarding your assets to not run out of money and not leave something for your kids (if you have any. Otherwise, to your charities or relatives.)

    Term premiums have a guaranteed 100% loss on investment, unless you die before 62 years old (4% chance).

    The loss of that money ($600 a year times 15 years, or $9,000) is lost, along with the time value of money (at your best ROI rate for investments) on that amount. Over 40 years (to life expectancy), that is large.

    There is also the tax savings to consider. Life insurance gains (if designed properly) are tax-deferred, and normally, tax free.

    If your wife is 63 and you (god forbid) die at 63, she must live on your investments. I do not know what that total is, but it is 100% taxable. If you need $60,000 income TODAY to live on, in 16 years (you die), the same life style requires $108,057 in year 2019, given 4% inflation. How long will your TAXABLE retirement assets last for her? She will live probably for 20 or 30 years from that age…

    Permanent life insurance is just that – permanent. No matter when you die, the guaranteed death benefit – a check in your estate, waiting to be paid someday when you die, will flow to her balance sheet. It will dramatically improve the life she would have otherwise. She may not have to go back to work.

    But you can use your permanent life insurance to your benefit while you are alive! It has cash value (removed tax-free when designed properly) and the promise to replenish spent assets, like a reverse mortgage. Because you know that, you can freely and guilt-free spend your own assets and have more income- and therefore a better life – while you are ALIVE.

    Life insurance is as valuable when you are living as when you die.

    I can prove this with spreadsheets, but I am sure that you are getting the point. Contact me for additional clarity.

    Good luck with your efforts, and remember to be patient.

    • Thanks for stopping by and taking the time to comment, Jeffrey. You are correct in noting that life insurance – and all the various flavors – are difficult to summarize, particularly when every family’s situation is different. There are innumerable considerations and options when both factors are taken into account. There are two overarching points I wanted to convey in the post. First, life insurance can be part of an overall family financial plan, which it is for me, but should not be considered part of a retirement plan.

      You mention permanent life, and while I acknowledge that I am not intimately familiar with every nuance of every type of insurance, my guess is most people can get a much better return on low cost mutual funds.

      Second, I wanted to discuss how I use insurance – term life – as part of my financial plan. The down and dirty answer for me as to why term life works better than whole is because my wife and I do not have children and our nest-egg is fairly substantial and will easily carry both of us through retirement; and will easily carry her through if something were to happen to me earlier than desired. My utilization of insurance is strictly to pay off the mortgage in the event something does happen to me before she goes into retirement, thereby avoiding touching any money intended for retirement.

      While I did not discuss it in the post, another problem with the way people often buy insurance is that it is purchased blindly, without a specific thought of how it will be applied, in mind. I am not against life insurance. Depending on a families’ particular situation and needs, it can be part of an overall financial plan. A good friend who is definitely financially savvy, and whose judgement I respect, utilizes a universal plan because it fits into his overall financial plan. However, people should not mistakenly consider it an investment and part of their retirement plan.

      Again, thanks for stopping by and I hope you will do so on a regular basis.

Leave a Reply to SavvyJames Cancel reply

Your email address will not be published. Required fields are marked *