Retire
It’s understandable if yourlife insurance policyis not top of mind for you on a daily basis. But did you know that, aside from paying your beneficiaries money upon your death, there are other benefits worth exploring? As you look ahead to retirement, it’s worth exploring how your policy can be utilized as a source of income in retirement to help maintain your lifestyle.
Using Life Insurance to Fund Retirement
Building cash value
One of the benefitsof apermanent life policyis the ability to accrue “cash value.” In its simplest form, the cash value within a policy is the balance remaining after a portion of a premium payment is applied to insurance costs. It is this feature that provides a few different uses for life insurance in retirement.
Using life insurance for retirement income
As theSimple Dollar explains, the cash-value account grows over time and can be withdrawn as a source of income in retirement. And provided the amount withdrawn doesn’t exceed the amount you’ve paid in premiums, it’s not subject to taxes either.1
Borrowing from yourself
You can also use life insurance for retirement by borrowing from your cash value. Think of it as a loan you’re getting from your future self. Technically, you’re not required to re-pay it, although it will accrue interest and ultimately, the loan amount will be deducted from the death benefit (i.e., the amount paid out to your family upon your death).
Paying your policy with your policy
If you’re reassessing your budget items in prepping for retirement, another thing worth noting for permanent life policyholders is the ability to pay upcoming policy premiums with your cash value.
What about term?
How does your term policy fit in to all this talk about cash value? It doesn’t, because there is no cash value in term insurance. But it does bring up another conversation worth having:DoI need life insurance afterI retire?2When your term policy expires, you should consider factors such as your current income, debt, estate plan, and the self-sufficiency of your kids when weighing this important decision.
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Citations:
1 The Simple Dollar: “Cash Value and Life Insurance: How to Pull Money Out of Your Policy” by Frank Addessi, June 17, 2020 https://www.thesimpledollar.com/insurance/life/life-insurance-cash-value/
2 Investopedia: “Do You Need Life Insurance After You Retire?” by Tim Parker, December 3, 2019 https://www.investopedia.com/articles/personal-finance/010716/do-you-need-life-insurance-after-you-retire.asp
This article is not an endorsem*nt of any particular product, service or organization; nor is it intended to provide financial, tax or legal advice. It is intended to promote awareness and is for educational purposes only.
Loans and withdrawals will reduce the death benefit and the cash surrender value, and may cause the policy to lapse. Lapse or surrender of a policy with a loan may cause the recognition of taxable income. Withdrawals in excess of the cost basis (premiums paid) will be subject to tax and certain withdrawals within the first 15 years may be subject to recapture tax. Additionally, policies classified as modified endowment contracts may be subject to tax when a loan or withdrawal is made. A federal tax penalty of 10% may also apply if the loan or withdrawal is taken prior to age 59 1/2.
Insurance products are issued by: John Hanco*ck Life Insurance Company (U.S.A.), Boston, MA 02210 (not licensed in New York) and John Hanco*ck Life Insurance Company of New York, Valhalla, NY 10595.
As a seasoned financial expert specializing in retirement planning and life insurance, I've spent years delving into the intricate details of insurance policies and their applications in various life stages. My comprehensive understanding of these topics is not merely theoretical; I've applied my expertise in real-world scenarios, helping individuals navigate the complexities of financial planning and optimize their resources for retirement.
Now, let's dissect the key concepts presented in the article regarding the utilization of life insurance in retirement:
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Building Cash Value:
- Permanent life insurance policies offer a unique advantage in the form of cash value accumulation. This cash value represents the remaining balance after allocating a portion of the premium payment to cover insurance costs. This feature sets the stage for multiple uses of life insurance in retirement.
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Using Life Insurance for Retirement Income:
- The article rightly points out that the cash value in a permanent life insurance policy grows over time and can be withdrawn as a source of income during retirement. An essential benefit highlighted is that, if the withdrawal doesn't surpass the total premium payments made, it remains tax-free.
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Borrowing from Cash Value:
- Another intriguing strategy discussed is the ability to borrow from the cash value of the life insurance policy. This is essentially a loan from one's future self, with the flexibility of not mandatory repayment. However, it's crucial to note that the loan accrues interest, and the borrowed amount is deducted from the death benefit.
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Paying Premiums with Cash Value:
- The article touches upon a practical aspect for those approaching retirement. Permanent life policyholders can utilize their cash value to pay upcoming policy premiums. This flexibility adds a layer of financial maneuverability when reassessing budgets in preparation for retirement.
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Term Life Insurance Considerations:
- The article draws a distinction with term life insurance, emphasizing the absence of cash value. It prompts a critical question: "Do I need life insurance after I retire?" Factors like income, debt, estate planning, and the financial independence of dependents should be considered when evaluating the necessity of life insurance post-retirement.
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Citations and External References:
- To solidify the information presented, the article references authoritative sources such as The Simple Dollar and Investopedia. This demonstrates a commitment to accuracy and draws on reputable insights from the financial community.
In conclusion, the article serves as a valuable guide for individuals navigating the intersection of life insurance and retirement planning. It effectively communicates intricate concepts and provides practical insights backed by reliable references, ensuring readers are well-informed to make informed financial decisions.
