I was talking to my friend about retirement savings, and they mentioned that their life insurance policy will act as their retirement fund. They’ve had the policy since they were 19 and are now 26. They’ve been paying $110 monthly and claim that by age 65, they’ll have $1.5 million in untaxed income to withdraw.
What’s more, they plan to increase their payments to $300 a month soon and say that will bump the amount to nearly $6 million by age 65. This doesn’t sound realistic to me, but I don’t know much about life insurance. I’m also not sure if they’re confusing the policy’s cash value with its death benefit.
If anyone understands how this might work or has seen something similar, could you explain? Is this a smart financial move?
It’s unlikely those numbers are accurate. To reach $1.5 million from $110/month, they’d need an 11% annual return over 46 years, which isn’t realistic for most life insurance policies. Whole life policies usually return around 4-5%, and variable universal life (VUL) policies may average closer to 7%. Their numbers sound like an overly optimistic projection.
@Vega
That makes sense. I was wondering if they might be confusing the death benefit with the cash value. Also, is skipping a Roth IRA and focusing solely on this policy a bad idea? They don’t have a 401(k) yet either.
@Tilden
Yes, it’s a mistake to skip a Roth IRA or not max out a 401(k), especially if there’s an employer match. Life insurance can be part of a financial plan, but it shouldn’t replace traditional retirement savings.
It sounds like your friend has a permanent life insurance policy, such as whole life or universal life. These policies can accumulate cash value over time, but the cash value and the death benefit are two different things. The death benefit is the amount paid out to beneficiaries, while the cash value is what your friend could access while alive. To know for sure, they’d need to check their policy’s in-force illustration, which shows projections for cash value and death benefit growth over time.
Those figures don’t add up, especially with the contributions they’ve described. If this is a whole life or IUL policy, the returns are lower than what you’d see with stocks or mutual funds. A properly designed policy might generate a decent cash value, but it’s unlikely to hit the numbers your friend is quoting. They might be better off using a Roth IRA or 401(k) for retirement savings.
If they have an indexed universal life (IUL) policy or something similar, the death benefit might be $1.5 million, but that’s different from the cash value they can access. Policies like this often project returns, but they’re not guaranteed and usually don’t exceed 5-7% annually. It’s worth checking if they have an in-force illustration to understand what’s realistic.
It’s possible that they’re misunderstanding the policy. For $110 a month, even with decent returns, they’d likely have much less than $1.5 million in cash value by 65. It sounds like they might be relying on overly optimistic projections or confusing the death benefit with the cash value.