Is it worth using your life insurance with a cash value, for retirement?
When we start to think about how many different ways there are to retire - it can sometimes even be intimidating. That said, for all options, the risks are about the same, and the rewards don't vary too much. While the risks of losing money are different, most of your retirement savings plans require that you put up with potential losses in return for an income that may be more rewarding than just keeping money in the bank
Let's take a look at one of the interesting options that some people use - insurance for your life. Why life insurance? Actually, because it can provide you with a (maybe not the best) option to protect your money, with more money saved than what you would get from the bank thanks to a savings account.
Is it possible to use a life insurance policy to retire?
Of course you can use the policy to retire, and there are several ways to do it. The most common is that you use the cash value of the policy to generate income, just like you use your IRA, for example, or some other retirement plan option.
The second option for using a life insurance policy is to be able to use the death benefit so that your spouse's investment account is provided with funds to supplement it, or so that there is an account that you can leave as an inheritance. Let's dwell on this option for a while, because it should be looked at better.
Let's assume that you are much older than your spouse. You probably assume that you will die first, and you want your chosen one to have enough money. That said, you yourself want to have enough money in retirement to live a life without poverty.
Including life insurance in your retirement plan is a way to provide more freedom to spend money while you're alive. It's a great option because you'll know that when you die, your spouse will have the money they need, which they can use for their elderly carefree years.
Or, for example, you want to leave some money as an inheritance. You may have different purposes and desires for your inheritance. Maybe it's some nonprofit organization, or your grandchildren. Whatever your desire, life insurance gives you assurance that you can spend the money you save, and you will still have certain bills to spend on your inheritance in the event of your death.
How does it all work?
When you purchase a cash value life insurance policy - you pay certain premiums, the policy is topped up with cash value. You can use that value as you see fit. When you retire, you can either withdraw the money or take out a loan against the policy and spend that money as you see fit for whatever your retirement needs are.
This option has certain perks that other retirement plans don't have
- Life insurance does not include early withdrawal penalties. So, for example, if you retire before you reach age 59.5, you won't have a 10% penalty on the money you take out of your policy.
- Life insurance is not subject to RMDs (mandatory minimum deductibles). So if you don't retire until age 72, you won't have to take money out of your insurance policy or pay any penalties.
- Life insurance has no impact on MAGI (Modified Adjusted Gross Income). So you can increase your Social Security benefits. If you use such a policy to cover expenses, it will not be considered your income and therefore will not be taxable.
- In certain states, life insurance has special protection from creditors, so if someone tries to find out your income - it becomes invisible to them.
- Life insurance benefits may remain tax-free for the rest of your life if you follow certain rules.
How do I use life insurance?
You can use life insurance as part of your retirement plan by simply purchasing a policy. Life insurance itself will not be part of any of your other retirement plans. That is, it is not part of your IRA or 401(k). It's just another additional asset to help you in retirement.
Once you retire, you can use cash from this policy as well as money from other retirement plans, or combine all of your assets to cover necessary expenses.
You don't actually have to do anything for your life insurance policy to be declared a retirement plan. It will increase in cash value, which you can later use as you see fit.
Are there tax consequences if I cash out my life insurance policy?
Still, despite the certain benefits that life insurance provides, cashing out a policy can lead to some consequences. Any gain on such a policy (i.e., an amount of money greater than what you pay in premiums) will be subject to the usual income tax. Also, if you have a profit, you may not get it when you terminate the policy if you have any outstanding credit. This means that the tax you have to pay when you terminate the policy will be more than the money you actually receive.
You'll also lose any death money you were entitled to under the life insurance policy, and any other perks you might have gotten from it.
Was this article helpful?8 Posted by: 👨 James C. Mooney