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How to Use Life Insurance to Make a Sound Retirement Plan

Life insurance is an ideal financial product that can help plan one’s golden years. With the increase in life expectancy, it only makes sense to be prepared for the future financial needs after one retires from one’s job.

Life insurance plans that double as retirement plans typically have two phases – the accumulation phase and the annuity phase. During the accumulation phase, the policyholder pays premiums and the cash value of the policy increases. The money so accumulated is invested by the company in various securities and bonds. During the annuity phase, the policyholder will receive pension in the form of regular payouts.

Things to consider while planning one’s retirement

Before a person makes a retirement plan, there are a few things he/she should consider. Here are some of the factors an individual should look into before buying a retirement plan:

Savings: An individual should first look at how much savings he/she has in order to estimate the amount that can be invested in a retirement plan. It is advised to leave a part of the savings aside for important milestone expenditures and other miscellaneous expenses required to maintain the same lifestyle.

Risk philosophy: Certain retirement plans participate in funds to create wealth. One needs to ascertain a risk philosophy as to whether he/she will invest in only low risk funds or is willing to invest in high risk funds as well. While debt funds are associated with low risk, equity funds come with high risks.

Beneficiaries: One must decide his/her beneficiaries, or the people who will receive the death benefit on one’s untimely demise, before he/she buys the policy. The claim process will be much quicker when the beneficiary is mentioned in the policy as against the insurer examining and providing the amount to the legal beneficiary.

Rate of inflation: One should estimate the effect inflation will have in a person and his/her family’s lifestyle. It will help understand how much should be invested in the retirement plan so that the pension received during the annuity phase will be sufficient.

Life insurance plans that work as retirement plans

While there are many retirement tools in the market, here are three life insurance plan types that can be used as retirement plans:

Endowment PlansAn endowment plan is a form of savings plus protection tool as it offers a life cover for the fixed period of time and also offers to pay a maturity benefit in case the person survives the term. Certain insurance companies pay the maturity benefit or the death benefit along with bonuses, if any.

ULIPs: Unit-Linked Insurance Plans help an individual get a life cover, for the financial protection of his/her family, and also provide a platform to make investments in funds offered by the company. The policyholder will receive returns from the policy based on the performance of the funds chosen by the policyholder.

Whole life plansWhole life insurance plans provide lifetime coverage which will be advantageous in ensuring one’s family is protected against one’s unfortunate death. A few insurance companies offer a lump-sum amount as the maturity benefit if the person survives up to the age of 100 years. Some companies may even offer survival benefits after completion of the premium payment term. Since the cash value of whole life plans is high, policyholders can borrow low-interest loans from the policy.

While life insurance plans are helpful in making a foolproof retirement plan, the best strategy is to buy a term insurance policy for comparatively low premium and invest the rest of the savings in a full-time investment instrument which will provide higher and better returns.

Written By

Financial Analyst at Farmer's Insurance with over 25 years of experience working in the Financial Industry

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