Any discussion about life insurance as an investment after you retire is certain to draw strong opinions on both sides of the argument. Proponents of the idea point to the unique properties of life insurance, such as its guaranteed cash value, tax-deferred growth, tax-free death benefit and tax-free access to the cash. Opponents argue that life insurance can’t be a good investment because there are too many costs and the returns are minuscule. Both sides may have some merit, but their arguments don’t apply equally to all financial situations. The answer really depends on what you want to accomplish. In some cases, life insurance may be the only solution, which would make it a smart investment.

You Want to Maximize Your Pension

If you receive a pension at retirement, you are offered a few different options. The single-life option pays the highest monthly income, but there would be no income for your spouse if you die. The joint-life option would pay an income to your spouse, but you would receive a reduced current monthly payout. You could utilize a pension maximization strategy using life insurance to maximize your current pension income while providing for a lump-sum benefit that can be converted to lifetime income for your spouse. For example, if your single-life pension payout at age 65 is $5,000 per month, and your joint life option is $4,000 per month, choose the higher single-life option. You could then apply the $1,000 monthly difference, all or in part, to a life insurance policy. The death benefit would have to be big enough to replace at least the lower payout option of $4,000 per month. Because the death benefit proceeds are received tax-free, your spouse would benefit from a higher after-tax income.

The pension maximization strategy is somewhat complex in determining whether you would be better off with the single-life or joint-life option. A number of factors need to be considered, such as your and your spouse’s age, your projected life expectancy, your health, your tax bracket and the dollar difference between the two options. If you have health issues and can’t qualify for preferred rates, the strategy is not likely to work. It would be important to work with a qualified life insurance professional who can perform the complex calculations.

You Want to Maximize Your Estate

If your estate exceeds $5.43 million in 2015, it could be subject to estate taxes. With estate tax rates at 40%, your heirs may need to sell off assets to pay the taxes and any other costs related to settling the estate. That could be especially devastating if it resulted in the forced sale of a business or a valuable asset. Life insurance is the only solution that can provide immediate capital to pay estate settlement costs. Work with an estate planning attorney who can determine the most appropriate arrangement, which might include creating an irrevocable life insurance trust (ILIT) to own the life insurance. An ILIT removes the value of your life insurance from the estate so it is not included for tax purposes.

You Want to Maximize a Legacy

Use life insurance to maximize a financial legacy, especially if it is likely to be diminished by taxes. This strategy is often used to maximize the transfer of a qualified retirement plan (QRP) at death. For example, assume you have an individual retirement account (IRA) with a balance of $500,000, and you have sufficient other assets and income to cover your needs. You are considering passing the IRA on to your children, but when you turn age 70.5, you will need to start making required minimum distributions (RMD) regardless of whether you need them. That will reduce the value of the asset, and the fact that you have to pay taxes on the distributions diminishes their value even further. In addition, when your children receive the IRA, they will be required to pay income taxes on distributions.

If the IRA is a legacy asset, you could turn it into a tax-advantaged legacy by taking distributions currently and using them to purchase a life insurance policy. You would have to pay taxes on the distribution, but when you use the money to pay the premium on the life insurance policy, it would substantially increase the value of your legacy. Upon your death, your children would receive the income tax-free death benefit and the remaining balance of the IRA. Everybody wins with this strategy.

Term Insurance or Permanent Cash Value Insurance?

Term insurance is almost always used to solve a temporary need, which is why younger and middle-aged people buy it instead of permanent life insurance. Once they no longer have a need for the insurance, it can just go away. Term insurance is not the best option for retirees who are trying to maximize a pension, an estate or a legacy; it can become prohibitively expensive, and older people usually can’t qualify for longer-term coverage beyond 10 or 15 years. If you are going to need life insurance for the rest of your life, the best option is a permanent cash value life insurance policy. Although the premiums are much higher than term policies, they are fixed for the life of the policy; and as the policy ages, a larger amount of the annual premium is applied to the cash value. Regardless, the source of the premium dollars used for these life insurance solutions is generally funds that are transferred from one asset to another, just applied differently.