Ways to Use Life Insurance to Pay for Retirement

Life insurance, at its core, is a way to provide for your beneficiaries financially in the event of your passing. However, a permanent policy can also be an excellent way to support yourself during retirement by creating a steady stream of income. 

To make this possibility a reality, it helps to understand how different types of permanent life insurance can accrue cash value for you to take advantage of. Check out these ways you can use life insurance to pay for retirement. 

Cash Value and Whole Life

Whole life provides a lump sum death benefit upon the policy holder’s passing along with set premiums at the start of the policy. Unlike its cousin, term insurance, whole life is designed to last for exactly as long as the name implies. 

This type of policy also comes with a cash value that increases over the lifetime of the policy. Your insurer sets an interest rate, investing your premiums and paying that back into the cash pool. You can then choose to withdraw the cash or use it to borrow against the policy. 

Borrowing aside, the ability to withdraw from this continually growing cash value can provide some extra income for retirement. In addition to Social Security, and depending on the price of your policy’s premiums, this can be an excellent way to help pay for retirement while also providing for your beneficiaries at the end. 

Universal Life Investments

Whole life policies come with a high cost in premiums and limited control over your cash value, which leads many to look at universal life insurance as a better alternative. When it comes to insurance for seniors, this is one of the most flexible options available. 

Like whole life, universal increases its cash value over time as you make your premium payments. However, you can choose to pay only the cost of your insurance if you’re having a tougher financial year or choose to pay more towards the cash value when you’re having a good year. 

You also have more control over where your policy’s investments go. Once your policy management costs are deducted, the rest is yours to invest how you choose. In a whole life policy, the insurer chooses the investments for you. 

This can lead to a much higher return on investment if you make smart decisions. However, it also comes with more risk. By investing in the vehicles of your choice, your savings are left equally as exposed as stock market or other similar types of investments. Regardless, you can rely on the cash for retirement in the same way you would with a whole life policy. 

Converting to an Annuity

In order to create a reliable stream of income from your policy’s cash value, the best option is to convert your gains into an annuity. You simply sign a contract with your insurer, fund the annuity with your cash value, and the insurance companies pays you in fixed installment for the rest of your life. 

This is known as a 1035 exchange is tax-free. Many insurers also continue to pay benefits to your spouse after you pass for an additional cost. Keep in mind that opting for annuity limits the amount of money your beneficiaries receive from the policy. It’s an excellent option for funding retirement, but you might want a different policy to cover your loved financially if you opt for an annuity. 

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