retirement plan pad with pen and calculator

You likely know that when you’re planning for retirement, many experts recommend that you diversify your portfolio. But did you know that you can use life insurance as one of your options to help you build your nest egg? If the life insurance policy accumulates cash value, then you can later withdraw those funds.

Here, we take a look at how life insurance can be used for retirement, some of the advantages, as well as a few caveats. 

Why Use Life Insurance to Save for Retirement?

There is a prevailing myth that using life insurance to save for retirement is only something that the ultra-wealthy can do. However, you don’t need to be a millionaire to take advantage of a life insurance policy as a way to save. 

There are three key reasons why some people choose to use this method:

Tax Benefits

One of the primary benefits of a life insurance policy is that the death benefit is free from income tax. But did you know that the cash value that you build in the policy can potentially be taken tax-free? That means you won’t receive a 1099 on the interest the way you would with other investment vehicles like a CD or savings account. 

Flexibility

IRAs and 401(k)s each have specific funding limits, which put a cap on how much you can contribute each year. A life insurance policy, meanwhile, does not have this limit in place. 

Another restriction on IRAs and 401(k)s involves distribution: you will be penalized if you take distributions before reaching a certain age. Additionally, you are not required to take distributions on a certain schedule. This can make an insurance policy an attractive option if you need to withdraw funds for an emergency or plan on retiring early.

Leverage

Another feature that some people find beneficial is the ability to take a loan out against your policy. Even though there will be an interest charge on the loan, there is a good chance you will continue to earn interest even on the amount that you’ve borrowed from your policy.

A Few Things to Keep in Mind

Not all life insurance policies accumulate cash value. Term life insurance is often a less expensive policy, but it is only effective for a set number of years. Other types of policies, such as permanent life insurance, will build cash value over time. If you are considering using your life insurance policy to save for retirement, be sure to mention it to your agent so that they can help you pick the appropriate plan.

While you can withdraw money tax-free, it’s worth noting that you will be lowering your death benefit by using any accrued cash. You have the option to pay back the loan and replenish the death benefit. 

Learn More About How Life Insurance Can Work for You

Have you been thinking about purchasing a life insurance policy, but aren’t sure where to start? I’ll present options based on how you intend to use your policy so that you can make the best decision. Contact me today to learn more.

Sources:

https://www.thesimpledollar.com/insurance/life/life-insurance-cash-value/

https://theinsuranceproblog.com/how-to-use-whole-life-insurance-for-retirement/

https://theinsuranceproblog.com/the-life-insurance-retirement-plan/

https://www.johnhancock.com/financial-advice/ideas-insights/how-to-use-life-insurance-for-your-retirement.html