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?
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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.