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One of the most valuable advantages of whole life insurance is that it builds cash value that can be used later in life for important financial purposes, including retirement.1,2 But are whole life insurance policies really a good option for that purpose? This article can help you decide by answering the following questions:

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  • What are the benefits of whole life insurance and using it to supplement retirement?

  • Who should consider using whole life insurance as part of their retirement strategy?

  • What are the disadvantages of using whole life insurance in retirement?

What are the benefits of whole life insurance and using it to supplement retirement?

Whole life insurance is a life insurance policy that also builds up cash value with tax benefits.3 A portion of each premium is set aside and invested in the policy's cash value, which can be an alternative to saving.

While whole life insurance rates can be quite a bit higher than term life insurance , it offers several unique benefits.

1. Your life insurance benefit is permanent.

Term life insurance policies only last for a specific period — or term. Getting a new policy becomes more expensive (or even impossible) as you age. Permanent life insurance policies — like a whole life policy — often stay in force through age 100 or even higher, at which point the full death benefit is paid out.4 That means that one way or another, your loved ones will receive a lump sum cash benefit as long as you keep the policy in effect and premiums are paid.

2. The premium will always stay the same.

Unlike term life insurance, which must be renewed after a set amount of time at a higher rate, the monthly premium does not go up once you take out your whole life insurance policy. That's one reason it can be advantageous to take out a whole life insurance policy when you're younger and healthier — and insurance rates are lower.

3. You build guaranteed cash value.

With each policy premium payment you make, part of your premium goes to cover the insurance and administrative costs; then the rest goes toward building tax-deferred cash value. A policy's cash value can grow to a useful sum over time.

4. You may also get dividends.

Mutual life insurance companies, like Guardian, are owned by their policyholders. So, when you buy a whole life insurance policy from a mutual company, you become an owner of the company and may be entitled to dividends when there are profits.5 While not guaranteed, Guardian has paid a policyholder dividend every year since 1868. Dividends can be disbursed as a cash payout, used to pay your insurance premiums, or invested into your policy to help build up more cash value and a greater death benefit.

With whole life, your cash value grows at a guaranteed rate — plus dividends, if any — that can later be either withdrawn or borrowed against for future expenses, including retirement. Like any life insurance policy, the main reason to buy whole life insurance is the death benefit protection for finances of those who depend on you for support.

However, as children age, that may become less of an issue. That's why a whole life insurance policy can be a helpful way to supplement your retirement income stream, although it should not be your only source of income. Investing in a retirement account, like an IRA or 401(k) plan, is typically a more efficient way to save for retirement, especially if your company has a program that matches a percentage of workers' contributions.

That said, whole life insurance can be a complement to your financial portfolio, providing stability and an emergency fund in times of need. Here's why:

  • Other accounts may be subject to stock market volatility (or interest rates), and their earnings will fluctuate. When you stop working and decide to start drawing income from your retirement account, a market downturn can impact your cash values, and you may not want to sell. However, whole life insurance has guaranteed growth and is insulated from the typical market downturn. Whole life cash value is not dependent on market investment returns or a market interest rate. So, drawing from the policy's cash value can be a way to avoid selling investments that have gone down in value but may come back later.

  • The policy's cash value gets favorable tax treatment, so tax is deferred while your cash value grows over the years. That helps cash value grow more predictably, which risk-averse investors like. However, your monthly premiums are not tax-deductible, as they are in an IRA.

  • There are other tax advantages as well. You don't have to pay income taxes on the money withdrawn from your policy up to the amount you paid. So, for example, if over the years you paid in $100,000, you can withdraw up to $100,000 income tax-free.

  • Unless your policy is a "modified endowment contract," you can borrow against your cash value at any time without having to pay income taxes on the borrowed amount. However, withdrawing from your whole life policy's cash value will reduce the total amount of cash value remaining. Taking too much out can eventually cause your policy to lapse, which may require you to pay taxes on the policy if it terminates before your death.

  • Because whole life has guaranteed growth, it can add stability that allows for other, higher-risk retirement investments, which may bring higher returns and, ultimately, more retirement savings.

When it comes to your policy's cash value, it's essential to understand that cash value is not added to your death benefit. That means if you pass away and the cash value has not been used, you may lose it. Your beneficiary will still receive the insurance benefit, but the cash value goes back to your insurance provider.

You can access this cash value by borrowing or withdrawing from it before your death, but there are other options as well, such as a 1035 exchange for an annuity. This allows you to trade your insurance policy for an annuity without owing taxes.

Who should consider using whole life as part of their retirement?

When buying whole life, the younger you are, typically the better — for two reasons. First, your premiums will generally be lower, and those premiums will never increase. Second, the younger you are when you start your policy, the more time you'll have for cash value growth if you choose to use it to supplement retirement income.

Generally speaking, consider getting a whole life insurance policy by age 45 or even earlier. This still gives you time to build up cash, and most people are still in decent health at that age. That can help you qualify for coverage at a lower rate.

Cash value builds slowly at first, as most of the premium is used to pay for the cost of coverage plus administrative fees. The cash value typically builds more quickly after the first 15 years, depending on the policy. The older you get, the more you may want to reconsider getting a whole life insurance policy because you may not live long enough to reap the cash value benefit.

What if you're not in a position to afford whole life insurance for the entire coverage amount you need? One option to consider: buy a whole life insurance policy for as much as you can afford, then supplement it with a term policy with lower life insurance rates. That will give you the coverage you need when you're younger — especially if you have children at home. After the term policy lapses, you'll still have a whole life policy that can provide a death benefit, even as it starts to build cash value.

What are the disadvantages of using whole life insurance in retirement?

Whole life can be a good supplement for your retirement plans, but as noted, it should not be a stand-alone option. Compared to typical retirement investments (or even real estate), whole life insurance policies are insulated from market risk — which is good — but also tend to offer lower returns over time. It also takes time to build up cash value in the policy, so if you purchase it at a later age, you may not have time to build the cash value you want to help fund your retirement.

But it's important to remember: the main reason for having a whole life policy is to ensure that your loved ones are provided for in case of your death. That's something whole life insurance policies can do that other retirement funding options may not.

Talk to a life insurance professional about your needs

Life insurance policies cost more with age, so there's no better time than the present to look into it. Whole life insurance can be a powerful financial resource that not only helps protect your family and lifestyle but builds cash value to use later in life. Your situation is unique, and professional guidance is helpful to create a whole life contract designed for the specific needs of you and your loved ones.

So it helps to discuss your situation with a financial professional who has helped others get whole life insurance coverage. If you need help finding such a person, Guardian can connect you to a financial professional who can help.

Frequently asked questions about whole life insurance and retirement

Can whole life insurance be used for retirement?

Whole life can supplement other retirement savings, such as an IRA or 401(k) plan. However, it's usually not recommended as the sole source of funding for retirement. Whole life builds guaranteed cash value, making it a wealth-building vehicle that can be used for retirement income or other needs. Most importantly, it also provides a lump sum to your beneficiaries in case of your death.

Is whole life insurance a good retirement investment?

Because whole life insurance has a cash value that grows at a guaranteed rate, it can complement other retirement investments that depend on market fluctuations. You can use the cash value for income or to help fund a grandchild's education. Whole life policies also provide a death benefit to protect your family and loved ones in case of your death.

However, several factors come into play when determining if it's a good retirement investment for you. Before deciding, it's a good idea to talk with a financial professional about your insurance and retirement needs.

Is whole life insurance better than a 401(k)?

The cash value can be a way to supplement distributions from your 401(k) and provide financial support for your family in case of your death. However, even the best life insurance companies will not claim these policies should be relied on for most of your retirement income. Rather, a whole life policy can complement your 401(k) and other investments that depend on the market, potentially allowing you to take more risk with investments that have the potential for higher returns.

The returns in 401(k)s and IRAs typically fluctuate — which can be good or bad depending on the market. A whole life policy's guaranteed cash value provides extra stability to help get you through downturns in the market.

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1 Some whole life polices 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 professional and refer to your individual whole life policy illustration for more information.

2 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.

3 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.

4 All whole 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.

5 Dividends are not guaranteed. They are declared annually by Guardian’s Board of Directors.

Guardian® is a registered trademark of The Guardian Life Insurance Company of America.