When you’re planning for income in retirement, you probably think first about your 401(k) savings, Social Security, and maybe a pension. But there’s another asset that can be accessed in retirement that may not be on your radar—and you may already have or have at least considered it. A permanent life insurance policy.
While life insurance is typically associated with protecting your loved ones through a death benefit, some policies also offer another potential benefit: access to the policy’s cash value to help supplement an unforeseen need for extra money later in life.
Here’s how it works
When you pay premiums on a permanent life insurance policy, part of your payment goes toward the cost of the insurance and fees. The rest goes toward the cash value of your policy, which can grow tax-deferred over time. Some policies, like indexed universal life insurance, have options with more growth potential based on the performance of market indexes.
For many consumers, cash value growth simply means more money will be passed on to their beneficiaries when they die. But it can also be accessed to help meet financial needs today.
While limits, costs and rules do apply, cash value from your life insurance policy can generally be accessed tax-free through loans or withdrawals to help support needs such as:
- Unplanned or emergency expenses
- Health care costs
- Travel or lifestyle expenses
- Extra money in retirement
Why some people consider this retirement strategy
Retirement today looks different than it did for previous generations. People live longer and often need additional flexibility beyond traditional retirement accounts. If you’re already saving in retirement accounts like 401(k)s and IRAs, permanent life insurance can offer another source of money in the future.
Withdrawals and loans from a life insurance policy are typically tax-free. And unlike market-driven accounts like 401(k) and IRAs, indexed universal life insurance also can grow in value when the market does well and help limit losses when it doesn’t.
Together, these features can add a source of extra money in retirement with less concern about market ups and downs, changes in taxes, and making sure your money lasts.
Important considerations
Permanent life insurance isn’t meant to replace traditional retirement savings, but it can play a supporting role as part of a long-term retirement strategy. Keep in mind that policy loans and withdrawals can reduce your policy’s cash value and the death benefit received by your loved ones, and they may have tax implications, depending on the situation. A financial professional can help you decide whether a life insurance policy aligns with your plans and protection needs.
For a more in-depth review of this strategy, check out our supplemental income plan brochure (PDF).
Additional reading:
Life insurance decoded: What are premiums?
Income, not just assets: Rethinking retirement planning for a longer future
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