Benefits of using life insurance as a retirement savings plan include the ability to grow tax-deferred cash value and take out loans against the policy, reports U.S. News & World Report. Older policies may earn enough dividends to pay the premiums, so cash value continues to grow without further investment. However, 401(k) plans and IRAs grow tax-deferred cash value as well, and these plans are less costly to fund and maintain than life insurance policies, points out CNN Money.
Although life insurance marketing agents posit that clients can buy policies that build cash value over time, ultimately negating the need to pay premiums, a number of things can go wrong with this strategy, explains U.S. News & World Report. Investments may not perform to expectations, and the policyholder may not be able to sufficiently fund the policy. Additionally, surrender charges may make it prohibitively expensive for a policyholder to opt out of a badly managed policy or convert it into a more lucrative investment vehicle. If the cash value of the insurance policy drops after the policyholder takes out a loan, a substantial tax bill may ensue, warns MarketWatch.
Extra costs of life insurance policies include annual investment fees, mortality and expense fees, and marketing and sales commissions, according to CNN Money. Not all insurance companies disclose all these fees to their policyholders. Before considering life insurance as an option for retirement savings, consumers should first look into qualified retirement plans such as 401(k)s, pension plans and variable annuities, advises U.S. News & World Report.