I’m only 26 years young, but that doesn’t excuse me from planning for my retirement. As I have shared my simple retirement plan before, many of you know that I am taking action right now in a few ways: wife’s 403(b), two Roth IRAs, and real estate. There’s nothing unusual about my retirement plan – other than the fact that I am ahead of the curve. But, there is one element of my retirement plan that I don’t talk about very often.

The reason for not talking about it that often is because of three reasons:

  1. I’m not depending on it – the other things that I am doing should suffice
  2. It’s not that large of my retirement plan
  3. It’s one of the most argued points on the internet.

Have I got your attention yet? Are you curious to know what I am talking about?

If you haven’t guessed it from the title yet, it’s my life insurance plan – but not just any life insurance – it’s my whole life insurance plan. Click through if you want to read my rationale for buying it. Despite what people may think, whole life insurance isn’t all bad. Depending on your situation, it may be a better option for you than term life insurance, which doesn’t offer you any investment opportunities and works against you if you live too long.

How Life Insurance Can Be a Part of Your Retirement Plan

There are a number of reasons why I am starting to think of my life insurance plan as a very small part of my retirement plan.

Promising Returns

It’s been two years since I have bought my life insurance plan. That means I just paid my third annual premium (1 at time of purchasing the plan, 1 at the end of first year, and this most recent one at the end of the 2nd year). In the two years since having my plan, the cash value of my plan has grown in excess of of one year’s annual premium. Based on some simple ‘back-of-the-napkin’ math, my 2013 dividend which is used to increase the cash value was about 8% of my annual premium.

While there are no guaranteed returns, I bought my plan from a company who has a long history of solid returns on investment – but there are a number of different companies to choose from. It’s important to do your research before selecting a company to purchase your life insurance plan, especially if you are going to incorporate it into your retirement plan.

Based on the promising returns that I described, there is a good chance that I will have 1-2 years of expenses in whole life plan’s cash value before I retire. That’s not bad considering how little I pay each year.

Practically Tax-Free Money

The other important element to using my whole life insurance plan as a part of my retirement plan is that it is tax free money. I have many ways to access the cash value, but the best way is to take out a loan against the plan. There is a 8% interest rate on the amount that you take out, but the amount is still earning dividends, so the interest rate is more like 1% or less, depending on the market.

What this means is that for 2-4 years, I could supplement my taxable income with this non-taxable income and therefore stay in a lower tax bracket – thereby paying a lower effective tax rate and using my money more efficiently in retirement.

To be clear, I am not putting all of my eggs in this basket. However, it is a nice perk to having a whole life insurance plan and one that I choose not to ignore.

Readers, do you have a whole life plan? Do you consider it part of your retirement plan?