While most people associate life insurance with the death benefit used to provide a financial safety net for loved ones, many policies also offer financial benefits that can be used for retirement planning. To help you get the most value out of your policy, we’ll discuss how you can use life insurance in your retirement planning.
Life Insurance Strategies for Retirement Planning
1. Accrue Cash Value from a Permanent Policy
Permanent life insurance policies including whole life, universal, variable, and indexed-universal have a death benefit and accumulate cash value over time. When you pay premiums for these policies, some of the money goes towards coverage while the other goes into an investment account where it grows tax-deferred. The cash value from your policy includes both the money you’ve put in, and the interest you’ve earned through investments.
The investment choices available to you will depend on the type of policy you have and the insurance carrier that provides it. Many permanent life insurance policies enable you to tie the cash value component to an index like the S&P 500 or Dow Jones, where your money will grow in relation to the performance of the index. Alternatively, you may be able to choose a fixed rate of return which may be considered a safer, but lower reward option.
The cash value component of permanent insurance makes it an ideal choice for people who want to use their life insurance for retirement because you can simultaneously get coverage and build a retirement fund over the course of your life. Another benefit is that when you get older, you can use the interest earnings to pay premiums and keep the policy in force — so the policy will pay for itself later in life. Of course, using this strategy is dependent on the policyholder contributing enough throughout their lifetime. Some policies offer lower premiums in exchange for a reduced or no investment component, so make sure you contribute enough to build an adequate retirement saving fund.
2. Invest Premium Savings from a Term Policy
Whereas permanent life insurance provides coverage throughout your entire life and builds cash value over time, term insurance only provides coverage for a specified period (1-30 years) and does not accumulate any cash value.
Without cash value, how can term policies be used for retirement planning? Term policies typically offer cheaper premiums than permanent insurance, so policyholders can use the cost savings to create a retirement fund through any means they choose. Since you aren’t limited by investment options as you are with a permanent policy, you can invest the money however you want which offers greater flexibility. For example, you can invest in individual stocks, crypto currencies, or even real estate.
Where you invest and how much is entirely up to you, which is an appealing benefit. However, this strategy requires planning and discipline. You’ll want to make sure your investments are on track to yield the results you want by retirement, and that you don’t skip on contributions in favor of paying for other expenses.
3. Borrow from the Policy through a Loan
If you have whole life insurance, you may be able borrow money from the policy through a loan. Basically, you can borrow money from the policy’s value which you can choose to repay (with interest) in life, or have that money come out of the death benefit when you pass away. Some insurance carriers provide this as an option, but you can also look at a third-party whole life loan program as an alternative.
4. Surrender Your Policy to Recoup Value
Individuals with permanent life insurance can choose to surrender their policy with their insurer, which immediately terminates coverage in exchange for a check that includes the cash surrender value minus surrender fees.
If you’re nearing or in retirement and can no longer afford your policy, surrendering is an option, but it is not recommended because you’ll get a minimal return for your policy. Your insurance company will give you a take it or leave it offer, and while you’ll at least get some money, you can get far more by taking your policy to the free market through a life settlement.
5. Sell Your Policy Through a Life Settlement
Your life insurance policy may be one of your largest assets, potentially worth as much or more than your house — and much like your house or any other asset, you can choose to sell it for a large cash sum. The process of selling a a life insurance policy is known as a life settlement, and it can help you get a value worth up to 60% of the policy’s death benefit amount, 4 to 11 times more than you’d get from surrendering it.
Selling your life insurance policy can be a great option to consider for your retirement planning for a few reasons:
- Lump-sum payment: The most attractive benefit of a life settlement is the money you’ll receive, which can be used to pay for retirement expenses including living costs, vacations, or creating an emergency fund.
- No more premiums: In addition to getting a large cash payment, you also save by not having to pay expensive insurance premiums.
- Recoup money from an unnecessary policy: Many people find that life insurance is beneficial when you’re young and want to create a safety net for loved ones, but unnecessary when you’re older and those loved ones are financially independent. While you could cancel your policy or surrender it, selling it will help you recoup the money you’ve put in over time.
If you’re interested in selling your life insurance to pay for retirement, contact Harbor Life Settlements for a free estimate and find out how much your policy is worth!