3 reasons why life insurance is a smart way to invest and protect your loved ones

July 07, 2022

You already have a savings account and a 401(k), not to mention that Social Security check. So why would you need a life insurance policy too, especially after age 65? The truth is, purchasing whole life insurance, even in your golden years, is a wise way to accumulate wealth and leave a legacy to your loved ones.

Here we’ll cover three surprising ways life insurance can be a smart way to save and build additional wealth—and how it can serve you better than a savings account or IRA.

Whole life insurance can accumulate more wealth than a savings account—without the tax implications of an IRA.

Since we were young, most of us were taught to put money away in savings accounts. And even though the sentiment is correct, a savings account is, unfortunately, very limited in its returns. The average interest rate for most savings accounts is a meager 0.06%. Worse, what little interest you do accumulate is taxable income, meaning Uncle Sam will add this amount to what you owe at the end of the year.

Okay, so we know that life insurance can accumulate wealth faster than your average savings account. But what about an IRA? Many people over age 65 mistakenly believe that because they already have an IRA, they don’t need life insurance. But the truth is, a life insurance policy can offer tremendous tax benefits that an IRA can’t.

Most of today’s IRAs require that a spouse or another beneficiary receive all IRA funds within a decade of the owner’s passing. This forces them to take larger distributions at a time, and even pushes them into a higher tax bracket. But a life insurance policy doesn’t have these same restrictions.

Most life insurance policies allow a beneficiary to stretch smaller distributions over a longer period of time. Plus, when the money is distributed, it’s considered a “death benefit,” which is usually income tax-free. The money is only taxed if a person’s total estate is worth more than $11.7 million, which for the average person, is unlikely.

The bottom line: If you’re looking for a way to continue to build wealth but want to avoid the tax implications of an IRA, investigate whole life insurance. Keep in mind, you can also combine a life insurance policy and an IRA to provide even more for your loved ones after you’re gone. If you’re already receiving required minimum distributions from a 401(k) now, you can always put this money toward a life insurance policy today. Investing now can leave a larger legacy later.

Life insurance can help pay for end-of-life costs and remain income tax-free.

The average cost of a funeral and burial is $7,640, but it can be much more, depending on where you live and the type of service you would like one day. You don’t want to leave these costs to your loved ones as they try to honor you and remember your life.

Fortunately, life insurance, including both term life policies and whole life policies, offer a death benefit as a lump sum payout to your beneficiaries. In addition, Lumico offers a smaller, affordable Final Expense policy that covers end-of-life expenses and a legacy for loved ones. For all Lumico life insurance policies, payouts are income tax-free and can be used to help cover a funeral, burial, and other end-of-life expenses.

As we mentioned, a whole life policy can accrue cash every year, thus building wealth. This extra cash can be incredibly important as you age and if you need additional care. After all, the average cost of a room in a nursing home is $7,698 per month. If you need help in the comfort of your own home, you may have to pay $20 an hour, on average, for cooking, cleaning, and other care services.

Fortunately, many whole life insurance policies allow you access to some of the cash you’ve accumulated early should you need it. Plus, it’s always worth asking your insurance company if they offer an earlier payout (known as a living benefit or accelerated death benefit rider) for chronic care and terminal illnesses. If they do, you may be able to receive part of your policy’s death benefit before you pass away. This flexibility can help pay for the high cost of end-of-life and chronic care.

Finally, life insurance can increase your spouse’s income—over what they’d receive from your pension.

If you have a pension now, you’re already heading toward a more secure retirement. But most pensions also ask you to decide if you’d like to receive a survivor benefit for your spouse after you pass away. If you select “yes,” then you may lower your pension payouts by a significant amount (usually 10%). Just imagine—if you receive $80,000 from your pension, this could reduce you income by $8,000 a year. That could be tens of thousands of dollars over the years.

However, if you purchase a life insurance policy, you can choose the larger payout payout. That’s because your spouse will already receive a death benefit from your life insurance policy, so they won’t need your pension’s survivor benefit. In the end, you can almost guarantee that your spouse will receive a larger monthly income and a more secure lifestyle, even when you’re no longer there to financially provide for them.

Don’t have a pension? If you and your spouse are relying on Social Security checks in retirement, or even Social Security and an IRA, a life insurance policy is just another way to boost your spouse’s income after you pass away.

A financial strategy worth thinking about

Even if you’re in your golden years, or they’re right around the corner, it’s worth looking into a life insurance policy. Many people don’t think of life insurance has a wealth building or tax-saving strategy, but it can actually offer tremendous financial benefits over savings accounts, IRAs, and pensions. Best of all, you can always combine these retirement savings strategies to get the best of both worlds—tax benefits, plus more financial security.


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