How to Actually Use Your Life Insurance in Retirement

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F83D8917-FEF7-4972-9DB4-DCF74B06C6C6By Brad Cummins

For most people, life insurance may represent just simply a way to provide cash for loved ones in the event of the unexpected. The death benefit proceeds would be paid out so that funeral costs and other large debts could be paid off, and possibly also so that the policy’s funds can provide an ongoing income stream for a surviving spouse and young children in order to pay their living expenses.

For most people, life insurance may represent just simply a way to provide cash for loved ones in the event of the unexpected. The death benefit proceeds would be paid out so that funeral costs and other large debts could be paid off, and possibly also so that the policy’s funds can provide an ongoing income stream for a surviving spouse and young children in order to pay their living expenses.

While these are certainly viable ways in which this financial vehicle can – and should – be used, the truth is that there are also many other ways that this important tool can be set up so that people can also make use of its many benefits during their lifetime.

Here are just a few examples:

First, when it comes to permanent life insurance policies, many of these plans can provide a substantial amount of liquidity in the case of a financial emergency. In addition to death benefit protection, permanent life insurance policies also offer a cash value component.

This cash value is allow to grow on a tax-deferred basis. What this means is that any of the gain on those funds will not be taxed unless or until the time it is withdrawn. This can essentially allow the money in that component of the policy to grow and compound over time by a great deal more than any type of comparable taxable account.

Regardless of whether you own a whole life or a universal life insurance policy, you can typically withdraw or borrow funds from the cash value component for any need that you have. This can include paying off large or high interest debt obligations like a mortgage or credit card balances, funding a child’s or a grandchild’s college education expenses, or even taking the vacation of a lifetime. Any unpaid balance at the time of the insured’s passing would be charged against the amount of the death benefit that is paid out to the policy’s beneficiary.

Assessing Living Benefits for Various Health Care Needs

Many of today’s permanent life insurance policies also offer what are known as “living benefits.” These are essentially “accelerated death benefits” whereby the insured will be able to access a portion of the death benefit funds during his or her lifetime for various reasons such as being diagnosed with a certain type of chronic health conditions or having a long-term care need and being confined to a skilled nursing home.

In most cases, the funds that are received are not subject to federal income taxes (as long as the distribution of the funds meets certain guidelines). And, in most states, the money may also not be subject to state income taxation, either.

Here again, the amount of funds that are withdrawn will go against the death benefit that is eventually paid out to the beneficiary. However, these funds may be more useful during life in some situations.

Unlocking Funds to Supplement Retirement Income

Today, many retirees are making use of indexed universal life (IUL) insurance to help in supplementing their retirement income needs. Because some people may find that they have an income shortfall when it comes to what they receive from their employer-sponsored retirement plan and / or Social Security benefits, they may need to fill in that “gap” with money from other sources – and an IUL policy may be just the key.

These plans can also be beneficial for those who are early retirees (under age 59 1/2), because there are no 10% IRS early withdrawal penalties to contend with when taking out your cash like there are on annuities and retirement plans like 401(k)s and traditional IRAs.

How to See Your Policy in a Different Light

Seeing your life insurance policy in a different light can make it much more useful to you – especially if it has a significant amount of cash value built up inside of it – cash that will continue to grow tax-deferred over time.

If you’re at a loss for how to move forward with your insurance planning, working with an independent life insurance advisor can help. In doing so, you will be able to compare plans from a variety of different carriers and from there you can determine which benefits will work the best for your specific circumstances and goals.

Brad Cummins, founder of LocalLifeAgents, a Columbus, Ohio-based firm of independent insurance agents.

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