When it comes to retirement, many people wonder if they will have enough cash to keep their standard of living the same as when they were working. With only Social Security and a retirement pension, many people find that they no longer can live the type of lifestyle they once did when they were working. In addition, unforeseen circumstances can cause a nest egg too quickly disappear. Medical bills, loss of a spouse, cost of living increases, and taxes are just a few of the reasons many seniors become unable to survive financially.
However, there is a solution to many of these cash flow problems: cash value life insurance. Purchasing a cash value life insurance policy can be a smart way to provide an additional source of cash when needed. Many people who have used a cash value life insurance calculator already know how a policy can quickly build up equity over time. What they don’t know is that there are a number of roles that cash value life insurance can play in a retirement plan.
Securing Your Source of Retirement Income
At retirement, a cash value life insurance policy can provide a cash value that can be:
- Taken in a lump sum by surrendering the policy
- Converted into a guaranteed lifetime income
- Withdrawn periodically to supplement retirement income
Protecting Retirement Income
Many workers who have a pension plan opt for the lower payable amount so that their spouse will have a source of income should they die first. However, selecting the maximum life annuity pension option from a pension plan, then using life insurance death benefits to help replace the lost pension income for a spouse is one way to maximize pension potential. This gives the retiree the peace of mind knowing that if something should happen to them, their spouse will have a continued source of retirement income. In addition, both retiree and spouse will enjoy a larger pension amount while the retiree is still living.
Accelerated Death Benefits
Some life insurance companies make it possible for a policyholder to receive a portion of a policy’s death benefit prematurely in certain cases such as:
- If the policyholder becomes terminally ill
- A specific catastrophic illness requires long-term care
- A policyholder is placed in a nursing home for an extended period of time
Varied Features of Cash Value Life Insurance
There are several positive aspects of a cash value life insurance policy when planning for retirement. Some of these include:
- Immediate Death Benefit – The cash value life insurance policy allows for a person’s family to be protected with death benefits during the working years. These benefits are paid to a person’s family income-tax free to help provide for housing, educational expenses, or other needs.
- Tax-Deferred Growth – Currently, under federal law, the annual growth of the cash value in a cash value life insurance policy is not subject to current income tax. Money is some 401(k) plans, savings accounts, stock, bonds, and other investments will be charged with income tax at the time they are withdrawn or cashed out.
- Flexibility – There is a large degree of flexibility in certain types of cash value life insurance policies that allow for payments to increase or decrease, or for the purchaser to make large, single premium payments.
- Access to Cash Values – Many people under the age of 59 ½ find that when in need of cash, they are charged a tax penalty. However, with cash value life insurance, a person can borrow or withdraw life insurance cash values at any age without tax penalty.
- Ownership – If a person loses their job, their pensions or Social Security benefits may change. However, with cash value life insurance, the worker owns the policy and benefits are not affected by changes in employment.
- Disability Protection – In the case of disability, the waiver of premium benefit can take over the premium payments for the policy owner.
- Tax-Advantaged Retirement Income – The cash value of the policy can be converted to a retirement income that is fully or partially free from federal income tax. Withdrawals and loans will reduce the policy’s death benefit and cash value available for use.
Find the Best Fit for You
There are four types of cash value life insurance to choose from to satisfy a person’s needs and objectives. These include whole life insurance, universal life insurance, variable life insurance, and variable universal life insurance. There are three categories of cash value insurance:
- Flexible or fixed premiums
- Responsibility for investment decisions
- Benefit guarantees or benefits based on actual investment retures
Whole Life Insurance
With whole life insurance, the policy owner pays a fixed premium while the cash value accumulates as a guaranteed rate of return. The insurance company then promises to pay a guaranteed death benefit. In addition, policy dividends may be payable also.
Universal Life Insurance
The policy owner can decrease or increase premium payments while selecting from a level or increasing death benefit. Reflected in the current interest rates or tied to a stock market index, such as the S&P 500 Index, the cash value is not a set amount.
Variable Life Insurance
With a variable life insurance policy, the policy owner pays a fixed, level premium as with whole life insurance. However, they choose from a variety of investment options for cash value accumulations. There is generally a minimum guaranteed benefit at death. The potential for higher death benefits depends on the performance of the investment options selected. The cash value available depends solely on the performance of the investment options selected.
Variable Universal Life Insurance
This type of life insurance combines the best of universal and variable life insurance. The policy owner can decrease or increase premium payments and select from a wide variety of investment options for cash value accumulations. If a minimum premium payment schedule is kept, there may also be a minimum guaranteed death benefit. Since cash values are not guaranteed, the available cash value, as well as the potentially higher death benefit, depends upon the performance of the investment options selected.
With so many different ways to boost cash flow after retirement, as with any major financial decisions, consult a trusted financial expert for the best options for your particular retirement needs.
