December 26, 2018
The Benefits of Life Insurance in Retirement Planning
Most people consider life insurance for one reason — a death benefit payout. In many cases, life insurance is used to ensure that family members have sufficient resources to meet financial obligations after a loved one’s death. However, life insurance can provide other benefits, including an additional source of income during your retirement years. With effective planning, you can use life insurance as a valuable tool in your financial portfolio to ensure you have sufficient income during your retirement years to support your desired standard of living.
Three Benefits of Purchasing Life Insurance Policies
There are several different types of life insurance policies you may purchase. In this article, we are discussing the benefits of life insurance policies that accumulate cash value. Life insurance policies that accumulate cash value offer three main benefits:
- Death benefits are typically tax-exempt for beneficiaries.
- The potential to accumulate tax-deferred cash values.
- The option of receiving tax-advantaged income based on the policy’s cash value.
In addition to the above benefits, purchasing a life insurance policy as part of your overall financial strategy is a wise decision for many individuals. For instance, small business owners can use life insurance policies as an easy way to supplement retirement plans. In some cases, individuals can use the income from life insurance policies to delay their Social Security benefits. By delaying the date you begin receiving Social Security income, you may increase the amount of your monthly benefits.
Furthermore, the cash value of your life insurance policies may be accessed for any reason, unlike the funds in traditional retirement accounts. Therefore, you do not need to wait until you turn 59 ½ years old to access the cash value in your life insurance policies.
Accessing the Cash Value of Your Insurance Policies
As you pay the premiums for your life insurance policy, a portion of the premium is used to cover the cost of the policy. The remaining portion of the premium helps build cash value in the policy. The policy continues to accrue cash value as you pay the premiums and the value of the policy earns interest. During retirement (or at any time you need additional income), you can access the cash value of the policy through loans and withdrawals.
In most cases, loans against the cash value of a life insurance policy are not considered taxable income. You may also access the cash value through withdrawals. As long as you do not withdraw more money from the policy than you paid in premiums, you should not be taxed on withdrawals either. Therefore, you have two ways of accessing tax-free money from a life insurance policy to supplement retirement income.
Some Important Things to Keep in Mind When Using Life Insurance Policies to Supplement Retirement Income
Loans and withdrawals from life insurance policies can reduce the death benefit paid to beneficiaries. Therefore, you need to ensure that your heirs have sufficient funds available after your death to support themselves. If your heirs need the proceeds from the life insurance policies, accessing the cash value during retirement is not advisable.
If you intend to use life insurance policies for supplemental income during retirement, you may want to choose a lower death benefit. By overfunding the insurance policy by paying more than the required premium, the policy can accumulate a larger cash value for you to access during retirement.
However, investing in life insurance policies should only be considered after maximizing traditional forms of retirement planning. In addition, you need to ensure you have sufficient liquid assets during retirement to meet your needs. Life insurance policies are intended as a way to supplement retirement income. They should not be your first options for retirement savings.
You should periodically review your financial strategies for retirement savings. If your financial situation changes or your needs change, you may need to re-evaluate your strategies and make adjustments to ensure you and your family are protected.
Assistance With Retirement and Financial Planning
Even though using life insurance policies to supplement retirement income may sound simple, there are many factors to consider. Before you invest in life insurance policies, it is best to consult an experienced financial and retirement planner.
The attorneys of The Elder Care Firm of Christopher J. Berry, CELA assist couples in creating an estate plan according to their needs and goals. Call 888-390-4360 or use the contact form on our website to schedule an appointment with one of our Michigan estate planning attorneys.