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Thus far, the risk pooling discussion has focused on annuities. Another form of risk pooling for longevity is available through life insurance, and this chapter* explores the ways that life insurance can potentially be incorporated into lifetime financial planning. This discussion is mostly about whole life insurance in comparison to term life insurance, but other forms of permanent insurance will be discussed briefly at the end of the chapter*.

Whole life insurance can provide a foundation to allow the household to spend more and still be able to provide a bequest, or to increase spending even further by using the cash value as a volatility buffer for the investment portfolio. Whole life insurance can provide a source of funds to support legacy, liquidity, and even long-term care if a rider is added for that purpose. With life insurance playing this role, the retiree may also feel more comfortable using an annuity with lifetime spending protection, which provides the benefits of risk pooling to meet a retirement spending goal using a smaller asset base.

As well, when viewed as an investment, whole life insurance can provide an attractive alternative to holding bonds in an investment portfolio. Premiums are invested in the insurance company’s general account, which, as we have discussed, can provide advantages for fixed-income investments relative to what a household can obtain on its own. Life insurance also provides tax deferral for its cash value, and when properly structured, the cash value can be accessed on a tax-free basis during life (meaning that the cash value of life insurance behaves similarly to a Roth IRA). The death benefit is also provided on a tax-free basis. Because of limits on how much that can be invested into tax-deferred retirement plans, this aspect of life insurance can provide a way to obtain more tax-deferral for savings after exceeding other limits.

That being said, the traditional purpose of life insurance is to provide a death benefit to help support surviving family members or a family business in the event of the policyholder’s untimely death. In this context, the amount of life insurance one seeks to hold is what dependents would need to sustain their lifestyle or meet other obligations in the absence of the policyholder being able to contribute to the family through wages or other caretaking. As noted, life insurance can play other roles in a retirement income plan as well. This chapter* investigates life insurance from the broader retirement income perspective.