Life Insurance to Fund Retirement
At its core, life insurance exists to protect your loved ones after you are gone. However, certain types of life insurance can provide financial benefits for the policyholder during his or her lifetime. Life insurance is an asset even before death, it can provide a stream of cash to help fund retirement and pay for long term care if you become ill.
It is typically perceived that retirement planning is for yourself, and life insurance is for your beneficiaries. However, some financial advisors recommend life insurance as one way to assist in planning for retirement.
It is important to note that you should not solely rely on life insurance to finance your retirement. If used, it should be used as an accompaniment to existing funds and investments. Using life insurance during retirement will have some negative implications for the policy’s value. Whether this approach is a good fit for you depends on your individual circumstances.
Income Replacement
Life insurance protects those dependent on you who would be left vulnerable if you were to pass away. Life insurance covers monumental expenses like mortgage, college tuition, and income replacement. As a parent’s nest begins to empty out, their need for life insurance diminishes. However, it is unrealistic to think one will no longer need that protection in retirement. Retirees decide to reenter the workforce all the time whether it be to keep busy, make friends, or for supplemental income. If the supplemental income is crucial to your retirement, your life insurance policy can provide your spouse with the same protection.
Policies can also replace any income derived from your pension or social security benefits. After you pass, your surviving spouse will continue to receive the highest of the two benefits. The lower benefit will, unfortunately, cease to exist. However, if you don’t have dependents such as children or a spouse, there are better ways to plan for retirement.
Tax Benefits
If you have a permanent life insurance policy, then you have been building up cash the entire time you’ve had it. The dividends earned are considered a return of premiums paid and are therefore only taxable if the dividends exceed the premiums paid. This means your cash has been growing on a tax-deferred basis and you won’t be required to pay any until the policy is surrendered.
Permanent life insurance has gained popularity as a retirement supplement option due to economics. The tax advantage of life insurance makes it an attractive option for savings.
Using Dividends To Pay Premiums
If you choose to keep your policy going for the income or death benefit then the dividends you've earned can be used to pay the premiums on your policy. By doing this you’re literally paying for your policy with your policy while immediately freeing up some cash in your budget.
Withdraw From or Borrow Against the Cash Value
Among various life insurance policies, permanent policies are often sold as a way to supplement retirement savings. Purchasing permanent life insurance plans, whether it be variable, universal, or whole life, causes some of your premiums to go into a separate account that builds cash value alongside your death benefit. The biggest advantage to permanent life insurance is the ability to withdraw or borrow against this cash value
However, if your policy includes a cash value, it is important to note that your family will only receive the death benefit and not the cash value that has been built. Therefore, it can be extremely beneficial to use that value during your retirement. You can access portions of the cash tax-free if the amount taken is less than what you paid in. Anything that exceeds would be considered taxable. Additionally, you can borrow against it and choose to have the loan and interest paid by the death benefit after you pass.
It could take up to 15 years to earn enough cash value in a policy to generate a significant stream of retirement income. However, once you have that built value, it is extremely easy to get the money out. There is no approval process so it can take as little as a few days to access your money.
Long Term Care
If you are comfortable and financially stable in your current situation and are more concerned with long term care, you may want to consider converting the cash value in your policy to one that contains a long term-rider. It is possible to even switch to such on a tax-free basis.
Convert to Life Annuity
Many insurance providers will also allow you to surrender your permanent product and use the cash to purchase a life annuity. This can be an extremely effective strategy as long as there are no major tax implications.
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Many people don't view life insurance as a means to meet retirement-saving goals. Yet it can be an effective strategy for many. As you grow older your priorities change and therefore so will your life insurance needs. Stay proactive finding a financial professional who can help you manage these changes and create a strategy to help you reach your goals. Contact I&E Insurance today to get started.