How To Use Life Insurance In Your Retirement Plan

The only way to achieve your ideal retirement is through planning.

But planning for retirement can feel like trying to find your way out of a maze. With so many options available, it’s easy to get overwhelmed.

As you look ahead to retirement in New Jersey, you might consider life insurance as an income source during your golden years.

You might think of life insurance purely as a safety net for your loved ones after you’re gone. The good news is – it can also be a part of your retirement plan.

However, you might wonder if you still need it. How can it fit into your financial plan? What are the benefits of using life insurance during retirement?

Understanding Life Insurance in Retirement Planning NJ

When you retire in New Jersey, you need to understand the types and benefits of life insurance. This knowledge can help you make wise money choices. Life insurance provides peace of mind and supports your financial goals.

Types of Life Insurance

Life insurance is a contract between you and an insurance company. You pay premiums and the insurer promises to pay a death benefit to your beneficiaries when you pass away.

These policies come in various forms, each with unique features. There are two main types: term life insurance and permanent life insurance.

Term life insurance covers a specified period, like 10, 20, or 30 years. It pays a death benefit if you pass away during the term. This is generally less expensive, making it an attractive choice for those who want coverage without a long-term commitment.

Permanent life insurance includes whole life insurance and universal life insurance. If you keep up with the premiums, these policies do not expire and provide coverage for your entire life.

One benefit of a permanent life insurance policy is its cash value savings component. It builds cash value over time, which you can access during your lifetime to fund retirement.



• Whole life insurance offers a fixed premium and a cash value component that grows over time.
• Universal life insurance provides flexibility with adjustable premium payments and death benefits.

Benefits of Life Insurance for Retirees

For most retirees, life insurance can offer several advantages during their retirement years. Everyone’s financial situation is different, but life insurance offers several advantages that can benefit retirees. Here are some of the reasons why you may need an insurance policy in retirement:

Provides Financial Security

Life insurance can play a crucial role in your retirement strategy, offering both financial protection and investment opportunities.

For example, think about the cash value component in permanent life insurance policies. You can borrow against this value or withdraw from it. This means you have a financial cushion for emergencies. It gives you extra income and fills gaps left by social security or pension shortfalls.

It's important to consider your overall financial situation when deciding how to use the cash value in your life insurance policy.

Covers Final Expenses

Losing a loved one is a painful and emotionally challenging experience. If you don’t want to burden your family with funeral costs, life insurance can be used for end-of-life expenses.

The truth is that funerals are getting more expensive every year.

According to the 2023 General Price List Survey Report by the National Funeral Directors Association (NFDA), the average funeral cost was $8,300.



The lump sum from the life insurance can be used to pay for your funeral and other final expenses. This is a common strategy to ensure that end-of-life costs are managed without burdening loved ones.

Helps With Estate Taxes

If you plan to leave some legacy, life insurance helps with estate planning and equitable asset distribution. Your payout can cover estate taxes and ensure your heirs receive most of your estate.

Imagine you have a $1 million estate and $200,000 in estate taxes. A life insurance policy can cover these taxes, so your heirs keep the full $1 million.



In addition, proceeds from a life insurance policy are typically tax-free for beneficiaries. A $500,000 life insurance benefit would be received in full by your heirs, unlike other assets that might be reduced by taxes. This makes life insurance an attractive option for passing on wealth.

What is a Life Insurance Retirement Plan (LIRP)?

Think of an LIRP as a hybrid financial tool. It’s a life insurance policy with a twist: it also helps you save for retirement. LIRPs provide lifelong coverage and some unique benefits that set it apart from traditional retirement plans like 401(k)s or IRAs.

LIRPs are among the many financial products that can be used to enhance your retirement planning.

How LIRPs Work

In essence, an LIRP is a permanent life insurance policy that builds cash value and provides a death benefit.

When you pay premiums for your LIRP, part of that payment is put into your cash value. This savings account grows tax-deferred over time, meaning you don’t pay taxes on the gains. The cash value grows at a pre-determined interest rate, typically tied to an index.

Let’s say you start an LIRP at age 35. By the time you reach 65, you have paid a total of $150,000 in premiums. Due to the investment gains, the cash value has grown to $500,000.

You can begin to withdraw from your LIRP when you retire in New Jersey. If you need additional income, you can take out tax-free loans against the cash value. Such loans can be used to supplement your retirement income.



Any remaining balance in the account will be paid out tax-free to your loved ones through the death benefit.

Pros of LIRPs

An LIRP can be helpful during retirement for several reasons:



• Tax-Deferred Growth: Allows your investment in the cash value account to compound over time without the drag of annual taxes.
• Supplemental Income: Allows you to take tax-free loans or withdrawals from your policy’s cash value for a stream of supplemental income.
• Death Benefit: Ensures your beneficiary receives financial support, which is valuable if you want to leave a legacy.
• No Contribution Limits: Unlike IRAs and 401(k)s, there are no annual contribution limits on LIRPs.
• Flexibility: Offers flexibility in how and when you access your funds, unlike traditional retirement accounts that have required minimum distributions (RMDs) starting at age 72.

Cons of LIRPs

• Cost: LIRPs are more expensive than other investment vehicles.
• Complexity: LIRPs can be complex to manage as they require careful monitoring to avoid policy lapses or unexpected tax consequences.
• Fees: You may be charged administrative fees, mortality charges, and surrender charges if you cancel the policy early.

LIRP Compared to Traditional Retirement Plans

One key difference is the absence of contribution limits. Traditional plans have annual contribution limits, but LIRPs do not. This allows you to potentially save more if your income permits. Unlike traditional retirement plans, LIRPs do not typically offer a lump sum distribution option.

Traditional plans often require mandatory withdrawals starting at a certain age, known as Required Minimum Distributions (RMDs). On the other hand, LIRPs have no such requirements, so you have more flexibility on when and how to use your funds.

For instance, you have a large 401(k) and a LIRP. The LIRP provides a supplemental income source that doesn’t affect their taxable income significantly, unlike the 401(k) withdrawals. This can be a strategic advantage in managing retirement finances effectively.



For seniors who are looking for ways to optimize their retirement planning, an LIRP can be a strategic choice. Always ask a financial advisor if a LIRP fits your goals and retirement strategy.

Retirement Income Strategies

When planning your retirement, you need to maximize your income and how your life insurance policy can help.

Maximize Your Retirement Withdrawals

It's important to make the most of your retirement withdrawals. We recommend following the "4% rule." Basically, you will withdraw 4% of your retirement savings each year. If you have $1 million saved, you would withdraw $40,000 in the first year.

In each subsequent year, adjust the withdrawal amount for inflation to maintain your purchasing power. If inflation is 2%, you would increase the $40,000 by 2%, making the second-year withdrawal $40,800.



Following the 4% retirement rule will ensure predictable income sources for the rest of your life.

Diversify Your Retirement Savings

Diversifying your retirement savings means spreading your money among different types of investments.



For example, instead of putting all your money into stocks, you might also invest in bonds, real estate, or a mix of other assets. Diversification reduces risk and increases the chances of having enough money for retirement.

Invest in Mutual Funds and Life Insurance

Mutual funds and life insurance can work together to support your retirement plan. Mutual funds pool money from many investors to buy stocks or bonds.

For instance, you could invest part of your retirement savings in a mutual fund to gain exposure to different markets. At the same time, having life insurance can provide a financial safety net for your loved ones.



While mutual funds can grow your savings through potential market gains, life insurance offers protection. Combining these two will provide you with a solid financial plan for your golden years.

Frequently Asked Questions

Maintaining life insurance in retirement requires careful thought about costs, coverage, and your evolving financial needs. So we've compiled a comprehensive list of frequently asked questions (FAQs) to guide you through the process seamlessly.

Book a Retirement Planning Consultation

Choosing the right life insurance during retirement isn’t easy. Here at Leonard Financial Solutions, our goal is to empower you to make informed decisions.

As reputable advisors in New Jersey, our commitment to client satisfaction is evident in every consultation. We will ensure you receive personalized advice tailored to your unique needs and retirement objectives.



Don't leave your retirement to chance. Reach out and schedule your no-cost consultation today. It's the first step toward a better future and peace of mind in your golden years.