Questions that customers ask often prove to be inspirations for my columns.

I was asked two such questions recently: Where can I get higher rates of returns on my savings? And should I cash in my whole life insurance policy and invest the difference?

Both were asked by customers in the retirement phase of life. The questions are related because, since March, the government has reduced interest rates on savings.

Each individual has concerns on ways to make sure that not only will his or her retirement savings last, but can they enjoy the maximum benefit from their savings.

Consider four potential roles for whole life insurance in retirement income planning.

First, the death benefit for life insurance provides a method to meet legacy goals. A legacy goal is a desire to leave something to someone. Once the legacy goal is completed, the individual can stop worrying about preserving investment assets and enjoy a higher standard of living in retirement.

Second, a permanent death benefit supported through whole life insurance can be integrated into a retirement income plan by helping the retiree to justify the decision to buy an income annuity. Simply stated, to get the most guaranteed income from an annuity, you must chose a life income for you with no benefits to your spouse or family.

The retiree can feel comfortable buying an income annuity because of the understanding that the life insurance death benefit will return the amount spent on the annuity premium to the household at the time of death, when annuity payments cease.

This process known in the industry as Pension Maximization can work well when determining how to distribute a pension plan.

Third, the cash value of whole life insurance also provides a few interesting options for a retirement income plan. Cash value may serve as a volatility buffer to help manage sequence risk in retirement. It is guaranteed to grow and can provide a temporary resource to supplement retirement spending rather than being forced to sell portfolio assets at a loss during poor market environments.

I ran a whole life policy illustration to illustrate this point. A 30 year old male who purchases a $100,000 whole life insurance policy will have $90,202.00 in his cash value at age 70.

Finally, when considered a net of fees, taxes and insurance needs, cash value accumulation within a whole life policy can serve as an alternative and competitive means for investing in fixed-income assets, as opposed to using bonds or bond funds within a traditional investment portfolio. Currently, the value of most whole life insurance policies is earning about 3.50% interest. Compare that with a 0.5% certificate of deposit.

The second question about cashing in a life insurance policy and investing the difference creates more questions before an answer can be determined. Do you have a legacy goal? Do you understand you can withdraw dividends from your whole life policy? Do you understand you can borrow from your whole life policy? Have you requested a current illustration?

Current illustrations enable you to see projected growth in the cash value within your whole life policy. Are you really going to invest, or do you need money to supplement your retirement?

Cashing in a life insurance policy is easy to do. No more premium payments, cash in your pocket. Determining whether it is the best thing to do requires an understanding of how the policy works.

As always, before you make a decision, reach out to your life insurance agent, ask questions and get advice.

Bob Hollick is a State Farm Insurance agent based in Washington. His column appears every other Thursday in the Observer-Reporter.

To submit columns on financial planning, investing or business-related matters, email Rick Shrum at rshrum@observer-reporter.com.

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