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How Insurance Can Help with Retirement Planning

Dan Hunt, Senior Investment Strategist
Insurance isn’t just for supporting dependents if something happens to you. It can also be part of a long-term retirement strategy.

Buying insurance can feel a little like paying your taxes. You probably know it’s not optional, but it’s painful to actually cut the checks for it. Most people know that without insurance, their dependents would face potentially deep financial hardship if they were unable to work (or worse) due to some unfortunate event.

The cheapest way to protect them against such a contingency is usually “pure insurance.” For example, term insurance is a kind of life insurance that provides coverage for a defined time period. In the event of your untimely death during the specified period when the policy is active, the insurer will pay a defined amount to your beneficiaries. However, it leaves no residual value to you or your dependents if such an event does not occur. Buy enough of this type of coverage to help replace your income and you can feel like you checked a box and fulfilled your responsibility as a provider.

It turns out, however, insurance can help you do a lot more than check off boxes. Indeed, if you are comfortable using more sophisticated strategies, insurance could help you reach your long-term financial goals.

Insurance and Retirement

Other kinds of insurance, such as long-term care and cash value life, can be part of bolstering your retirement plan. My team at Morgan Stanley has done a lot of research on this topic.

Our basic finding is that, due to their tax treatment and risk mitigation features, many investors can improve the odds that they will have enough money to maintain their lifestyle throughout their retirement and meet other financial goals by integrating these kinds of policies into their long-term plan.

The Retirement Connection

Below are the two types of insurance with features that can make them a useful part of a retirement plan.

  • Long-term care insurance: These policies help provide for the cost of long-term care services, including home care and assisted living. You can buy this to protect your retirement savings from the possibility that you might one day need to hire professional caregivers, which could rapidly deplete your retirement savings.
  •  Cash-value life insurance: This type of life insurance (which includes universal life and whole life policies) typically costs more than term, because it incorporates a savings or investing component that you can tap in certain situations while you’re still living, very often without triggering any tax liability. This cash value component grows tax-deferred. That makes these types of policies very handy for those individuals (a small segment of the general public), who have put the maximum amount in their retirement plans and still have more money they would like to invest tax-deferred. They can usually borrow against the cash value and a certain amount can often also be withdrawn without penalty, allowing the policy to function as a kind of backstop against emergency retirement expenses. And, of course, if they never tap that cash value during their lifetime, it passes income-tax-free to their named beneficiaries. That makes it a handy tool for estate planning in some cases (especially in conjunction with other estate planning vehicles, like trust accounts).

It Can Get Complex

Our finances and goals are interrelated, so the use of insurance as a savings and investment strategy will often affect how best to structure and invest your assets alongside such policies. Due to the associated complexity, I think it’s usually best to work with a Financial Advisor to employ these kinds of strategies within a comprehensive retirement plan.

If you aren’t ready for that step, you may be able to purchase these kinds of insurance policies through your employer or online. Just make sure that you are buying policies from high-quality issuers that offer premiums you can afford and that align with your needs. Checking those boxes can help you to both fulfill your obligations to your dependents and achieve your long-term goals.

Risk Considerations

Insurance products are offered in conjunction with Morgan Stanley Smith Barney LLC’s licensed insurance agency affiliates.

Life insurance policy cash values are accessed through withdrawals and policy loans. Loans are charged interest; they are usually not taxable. Withdrawals are generally taxable to the extent they exceed basis in the policy. Loans that are still unpaid when the policy lapses or is surrendered while the insured is alive will be taxed immediately to the extent of gain in the policy. Unpaid loans and withdrawals reduce cash values and death benefits. They may also shorten the guarantee against lapse, which can lapse the policy and have tax consequences. For policies that are Modified Endowment Contracts (MECs), distributions (including loans) are taxable to the extent they exceed basis in the policy; an additional 10% federal income-tax penalty may apply. Consult your tax advisor for advice about your own situation.

Since life insurance is medically underwritten, you should not cancel your current policy until your new policy is in force. A change to your current policy may incur charges, fees and costs. A new policy will require a medical exam. Surrender charges may be imposed and the period of time for which the surrender charges apply may increase with a new policy. You should consult with your own tax advisors regarding your potential tax liability on surrenders.

Since long-term care insurance is medically underwritten, you should not cancel your current policy until your new policy is in force. A change to your current policy may incur charges, fees and costs. A new policy may require a medical exam. Actual premiums may vary from any initial quotation.

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