When pondering how you can extend your investment reach, many people land on the idea of utilizing their life insurance as part of their retirement planning. Although this is certainly an integral part of any solid financial plan, it’s not necessarily something to be marketed solely as an investment tool. Sure, you want to protect your family in case something happens to you. Yes, you want it to be a part of your overall retirement goals, but should it be part of your direct investment strategy? Maybe not.

That doesn’t mean you haven’t been approached by yourlife insurance company that claims you can benefit from using your funds as a safety net for retirement. This scenario is all too typical. In fact, here’s a likely one from US News and World Report:

Life insurance companies go after their high-earning professional clients to market this approach as an investment tool in conjunction with any standard investment plans they may already contribute to, such as 401(k)s. The life insurance company may convince them to purchase a policy to grow cash value until such time that the client withdraws the funds tax-free at retirement. There’s no need to repay the loan, with the only drawback being a reduction in death benefit.

Sounds good, right? Well, the costs usually outweigh the benefits. That’s because a big part of your premiums will go to cover the costs of underwriting the policy instead of being added into the cash pool.On top of that, as you age, you usually encounter worsening health problems, resulting in high insurance costs. MarketWatch points out that the cost per thousand of the amount at risk to the insurance company increases as you age.

Lots of bad things can happen when using life insurance as a form of retirement investing, such as:

  • The investments don’t perform as well as you have been led to believe
  • The client cannot fund the policy to the recommended level
  • The client takes out too much money and gets taxed heavily
  • The client is open to surrender charges if he or she wants to be released early of the commitment early or put their money in another type of investment plan.

While there could be benefits to this approach, the risks are far too great to feel good about this option. A better strategy would be to invest in something more stable such as a  401(k) or SEP-IRS, low-cost variable annuity, or pension plan with a cash-balance plan. Iflife insurance as an investment strategy is something you really feel strongly about, do your research and learn about the policies of different companies. Get all fees and expenses in writing, and talk to your broker about it first. Because there are so many forms of investment fraud, have a lawyer in your corner to ensure you don’t get taken for a ride.