Can life insurance be used as a fixed income investment?

Many term policies can be converted to whole life policies that have the same premium payable every year thereafter for life. The conversion option may only be available up to a certain age—like 75, for example. The whole life premium ($35,000 in your case) would be higher than a term life premium ($15,000 in your case) in the early years, and lower in the later years. 

A whole life insurance policy generally has a cash value that builds up in the early years because of the additional premiums that exceed the pure cost of insurance in those years. This value can be withdrawn, borrowed against, or allowed to continue to build. 

If someone’s health is poor and their life expectancy is likely to be very short, they may pay less in cumulative premiums by continuing to pay the escalating term life insurance premiums. Regardless, Dana, you should review the policy options in detail with your life insurance agent and be candid about your health problems. 

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I often compare liquidity events to fixed income. In other words, if someone is planning to sell or downsize their house, is selling a business, expects an inheritance, or anticipates a life insurance payout, the result of any of these events can be very much like a GIC or bond that matures at some point in the future. Some of these events are more predictable in terms of the timing and amount of incoming cash, and can sometimes justify taking on more risk with an investment portfolio. 

It does not sound like your health is so bad that you expect a really short life expectancy and an imminent life insurance death benefit to be paid out to your husband. On that basis, Dana, I think you need to be careful about considering your life insurance policy as the fixed income portion of your portfolio. You may be able to withdraw from the cash value portion of a whole life insurance policy or borrow against it, but you still need to manage your investments independently from the life insurance. 

If your investments are 80% or 100% in stocks instead of 60%, you will have more volatility as a result. You may not be comfortable with the more extreme ups and downs of your investments in a more aggressive portfolio, and knowing that you have a life insurance policy with a cash value may not appease your anxiety during a market crash. 

Another risk, given this is a strategy you are considering early in retirement, is that by increasing your life insurance premiums by $20,000 per year, you will be spending more and drawing down your investments more aggressively in the initial years of retirement. If this happens to be a bad period for stock markets as well, the combination of higher withdrawals and declining stocks could drastically diminish your portfolio. 

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