More than a financial security benefit for family: using life insurance in retirement
When you hear “life insurance,” you might think of a policy you’d purchase to leave a financial legacy or to protect your family in case you pass away unexpectedly. While those are the main reasons to buy a policy, life insurance can also include “living benefits” that offer flexibility, allowing it to adapt as your life changes.
Why consider permanent life insurance?
Permanent life insurance is more than just financially protecting those you love or your business in the future. It’s also about helping you achieve your goals and setting yourself, your loved ones or your business up for success today. With fewer restrictions and more flexibility than other types of life insurance, a permanent policy can help you:
- Live more. Unlike term insurance, permanent life insurance protects your family or your business for your entire life. It can also be used as a source of money for you and those who rely on you throughout your lifetime — for whatever, whenever. You can have the flexibility to access your money through withdrawals and loans throughout your life, generally tax-free.1
- Keep more. Permanent life insurance allows you to keep more of your money because it provides the potential for tax-deferred growth and gives you the ability to pass along money through the death benefit — generally with no income taxes.
- Build more. Unlike term insurance, permanent life insurance generally provides the option for cash value that can increase every year in a tax-deferred way — in turn helping you grow your assets. With a permanent life policy, you have a wide range of investment choices and more flexibility to invest how you want, depending on your preferences for market stability and growth potential.2
If you purchase permanent life insurance early enough and fund it correctly, you may be able to use it in one of the following ways in retirement:
- Pull out the cash value for unexpected or planned expenses. If you fund your life insurance policy correctly, you can access your cash value for anything from paying for a child’s college education or wedding to business expenses — without generally having to worry about the burden of taxes.1
- Take generally tax-free distributions to help supplement your retirement income. You can also design your life insurance policy so you can take withdrawals to help supplement the other income you receive during retirement. For example, if your other investments are down and you don’t want to lock in market losses, you can use the cash value in your life insurance policy to provide retirement income.3
- Pay for long-term care expenses, if you have the rider. Some permanent life insurance policies offer long-term care riders, which, when added to a life insurance policy for an additional fee, can help provide the flexibility to adapt your policy to your needs, offering a relatively affordable and effective way to help pay for potential long-term care costs.
While there are times when a term life insurance is an appropriate choice, a permanent policy may be a smart addition to your financial plan if you’d like more ways to help protect your family, minimize your taxes and find alternative ways to invest and potentially grow your money. Talk to a financial professional to see if a life insurance policy might make a good addition to your overall portfolio.
1 Loans and withdrawals reduce the policy’s cash value and death benefit, may cause certain policy benefits or riders to become unavailable, and may increase the chance the policy may lapse. Loans taken will be free of current income tax as long as the policy remains in effect until the insured’s death, does not lapse and is not a MEC. Please note outstanding loans accrue interest.
2 Under current federal tax rules, you generally may take tax-free partial withdrawals under a life insurance policy that is not a modified endowment contract (MEC), up to your basis in the contract. Additional amounts are includible in income. The IRS places a limit on how much money can go into life insurance premiums for the policy and how quickly such premiums can be paid in order for the policy to retain all of its tax benefits. If certain limits are exceeded, a MEC results. MEC policyholders may be subject to taxes on distributions on an income-first basis, that is, to the extent there is gain in their policies, and penalties on any taxable amount if they are not age 59½ or older. Loans taken will be free of current income tax as long as the policy remains in effect until the insured’s death, does not lapse and is not a MEC. Please note outstanding loans accrue interest. Income tax-free treatment also assumes the loan will eventually be satisfied from income tax-free death benefit proceeds. In addition, withdrawals, policy loans and any accrued interest may cause your policy to lapse even if you are in a period of coverage under the No-Lapse Guarantee Rider. Speak to your financial professional before taking any withdrawals or policy loans.
3 Please remember, withdrawals and loans from your life insurance policy will reduce the cash value and face amount of your policy, you may need to fund higher premiums in later years to keep the policy from lapsing.