Is a cash value life insurance policy a good idea for me in retirement?

I am roughly 10 years from retirement. My advisor has recommended that I place the conservative part of my portfolio into a cash value life insurance policy that I will be done paying in 7 years. It yields a 5 percent return after the paying period. Is this a good idea?

Co-Published on Investopedia

Co-Published on Investopedia

When I see advice like this my 'Spidey sense' starts to tingle and I worry the advisor might be motivated to sell a product rather than give you good advice. If you have a need for life insurance during retirement, this could be good advice. Very few people, however, have a need for life insurance during their retirement. 

Some examples of when you might need life insurance include:

  • You still have minor children to care for and get through college.

  • You own a business and have a buy-sell agreement in place with other owners.

  • You have a sizable estate and are want liquidity to pay for estate taxes (you don't owe estate taxes unless you have well over $11 million in net worth)

From your question, I didn't get the sense you fall into any of these categories or the other categories which would make life insurance appropriate for you. If you do have a true need for life insurance, then the advice is sound. If you don't, likely your advisor is also an insurance agent who is getting a kickback (commission) from the insurance company for selling you the policy. Maybe ask him how much he and his company will make from this policy.

Life insurance is generally a poor investment vehicle, as the cost of the insurance and other fees will eat away at the returns you get. I also am highly suspect of the 5% return being a fixed guaranteed return. More likely this is a projection and your return will vary depending on market conditions or the investment returns of the insurance company. Meaning it is not as safe as you might think. 

I recommend having a fiduciary and fee-only financial advisor do an analysis of the policy and compare the insurance policy projections to what a diversified bond portfolio might do over the same time period. You may be surprised by how much the advisor didn't tell you in their advice.

Because this is such a big issue with non-fiduciary financial advisors, Purposeful Finance (a non-profit organization) offers basic analysis for free to help people make more informed decisions. Even still, I think it would be worth you paying an advisor to help you with this decision as the true cost of the decisions could be enormous.

Joshua Escalante Troesh is the President of Purposeful Strategic Partners and a tenured professor of Business at El Camino College. To explore working with him on your personal financial planning and investment advising needs, simply schedule a free Discover Meeting.

Subscribe to get weekly answers to real people's financial questions.

* indicates required