Question: I’d like your opinion on life insurance as a retirement savings vehicle. As I understand it, the money I invest through premiums grows in value until I retire, and then I can take out a tax-free loan against the death benefit and don’t necessarily have to repay it. Should I do it?

Ric: No, and here’s why:

We usually see this kind of sales pitch from insurance agents and pseudofinancial advisors (who are actually insurance salespeople).

They suggest that instead of investing in the stock market or other investments where your money could lose value (they might cite the market’s decline in 2008 as an example of this “danger”), you instead invest in whole life, universal life or variable life insurance.

These policies offer insurance protection in case you die while also allowing your money to grow tax-free inside the policy. This, they say, creates a piggy bank from which you can borrow or simply withdraw when you’re retired.

It sounds attractive, but the idea has many flaws.

First, if you put too much money into the policy in the early years it can become what’s called a modified endowment contract. If that happens, the future loans and withdrawals would not be tax-free.

Second, the agent will show you a chart revealing what the cash value of the policy is projected to be after 10 or 20 years. This data might look good, but the agent might not tell you about these issues:

High upfront costs. We’ve found that agents often earn commissions of 80% to 120% of your first-year premium when selling these policies. In other words, if you were to invest $10,000 in such a policy, the agent might earn $12,000. This is a big reason agents and “financial advisors” tout such products. (They might earn only $100 if you instead invest in a managed asset program. Talk about conflict of interest!)

Lack of flexibility. The account is likely to have no value for the first 10 years or more. In other words, you must pay premiums for that long before you have any hope of getting any money back. If you stop making payments or if you need the money sooner (say, due to changes in marital status, health, employment or more) you could find that the account value is zero and all your money is gone. (At least you’ll have had insurance coverage during that time, they’ll tell you.)

The withdrawal is tax-free simply because you’re stealing the money from your heirs. That’s right: Any money you take during your lifetime reduces the amount your heirs get upon your death. (Life insurance proceeds are tax-free at death, which is the basis for this “tax-free” withdrawal.)

Will the tax-free withdrawal provision always be there? Future lawmakers, looking for government revenue, might change the tax law and make policy loans or withdrawals taxable. California recently passed a retroactive tax on those who sold businesses in the past few years, and President Clinton retroactively increased taxes too. Can you really trust the agent’s claims about future tax-free withdrawal rights?

Buy life insurance for only one reason: to protect someone who would suffer financial loss upon your death. I’ve never seen any academic study or objective third party recommend your idea as a good way to save for retirement.

Don’t do it.

This material was prepared for informational and/or educational purposes only. Neither Financial Engines Advisors L.L.C (also referred to as Edelman Financial Engines) nor its affiliates offer tax or legal advice. Be sure to consult with a qualified tax or legal professional regarding the best options for your particular circumstances.