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How to use life insurance to pay for retirement

Tapping into your cash value can help supplement your retirement income – and it’s tax-free.

Permanent life insurance provides a death benefit and financial security to your loved ones when you die. However, its cash value component can be used to supplement your retirement funds.

How can I use life insurance to pay for retirement?

Access the cash value portion of your permanent life insurance while you’re still alive, and use it to pay for retirement. While the cash value amount could be significant depending on your policy, you’ll likely only be able to use life insurance to partially fund your retirement.

You may need to draw on other sources, such as Social Security or a retirement account, to fully fund most of your retirement. Some people choose to tap into their cash value after maxing out their other retirement accounts.

How to use life insurance to pay for retirement

The main way to use life insurance to help pay for retirement is through a whole life insurance policy that you withdraw money from. Once you’ve held the policy for 10 to 15 years, you’ll have accumulated enough cash value to begin taking loans against your own policy.

The amount of cash value that you have available depends on how much your policy’s death benefit is worth and how long you’ve had the policy. The longer you have your policy, the longer amount of time your cash value has to grow.

You’re allowed to withdraw as much of the available cash value as you like. However, pulling out all your available cash value surrenders the policy — which means you’ll no longer have coverage.

When do I have to pay back the loan?

While withdrawing from your cash value is considered a loan on your policy, you’re not required to pay back this loan. But be aware that if you don’t pay it back, the amount of cash value that you withdraw is deducted from your death benefit.

How to withdraw from your policy’s cash value

To physically access the money, you’ll need to contact your insurance company. Some insurers have online forms you can fill out, while others require you to make a phone call or mail in a request. Alternatively, reach out to your insurer or log in to your policyholder portal to find out how much cash value you’ve accumulated.

To prevent any back-and-forth, clearly state how much money you’d like to withdraw, and your preferred payment method — such as direct deposit or cheque.

How can I use term life insurance to pay for retirement?

Term life insurance doesn’t have any cash value to help fund your retirement. But it can still play a role in your retirement planning and budgeting.

If you’re still working and your spouse isn’t, then your income is an important component of your retirement budget that term life insurance can protect. Having term life insurance while you’re in retirement helps ensure that your spouse has adequate money to continue their retirement after you die.

If you have a term policy that expires at retirement age and you don’t need life insurance anymore, then letting your term policy expire also adds savings to your retirement budget. While term life insurance is considerably more affordable than permanent life insurance, letting your policy lapse can mean one less bill to pay when you’re in retirement.

Tax benefits of using life insurance to pay for retirement

There are many benefits of using life insurance to help pay for retirement, like being able to tap into the cash value of your life insurance whenever you wish. And even if you don’t use the cash value, you can also use the cash value to pay for your policy’s premiums and free up a large monthly payment in your budget.

Cash value from life insurance can be withdrawn on a tax-free basis, which has a few advantages. Your cash value is tax-deductible, but it can also put you in a lower tax bracket if you’re using the cash value to reduce how much you’re pulling from your IRA.

But while it’s not considered taxable income, the cash value from life insurance isn’t a perfect solution to avoiding taxes and fees. Cash value growth is based on the amount of money that you contribute to it, which is built into your premiums. The price you pay for your premiums also includes fees and commissions.

Speak with an accountant or financial advisor about the tax implications of your policy and its cash value. While pulling out cash value is almost always tax-free, there are certain instances that you may owe some tax on it, such as when you surrender the policy.

What to watch out for

The biggest factor to consider with your life insurance’s cash value is watching the amount of cash value that you actually have in your policy. Unless you’re ready to surrender or cancel your policy, you shouldn’t withdraw the entire cash value amount available to you. This can happen when you use the cash value to pay for the policy’s premiums and take out a loan.

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18 - 85 years old
10, 15, 20, 25, 30 years
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5, 10, 15, 20, 25 and 30 years
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18 - 85 years old
10, 15, 20, 25, 30, 35, 40 years to lifetime/age 121
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Alternative ways to fund your retirement

You’ll likely need other income sources to fully fund your retirement, since your life insurance cash value will be limited to the size of your policy and how long you’ve let it grow.

  • Social Security. Most people rely on Social Security to fund at least part of their retirement. The amount that you receive is based on an average of how much you earned while working, which means it might not be enough to completely rely on but can provide a strong basis.
  • Retirement accounts. Many people rely on some type of IRA or withdraw from a 401(k) to provide most of their retirement income. But these take time to build up, so plan to invest in one as early as possible to make the most of your account.
  • Personal savings. While investing in a retirement account can result in a bigger return on investment, having savings stashed away can help with unexpected expenses that could come up in retirement, like medical bills.
  • Part-time work. Entering retirement doesn’t have to mean an end to all work. Many retirees continue to work part time or may start their own side business to occupy their time and make some extra money.
  • Plan your retirement budget. Retirement may mean scaling down on big-ticket items you no longer need. Downsize your house after the kids move out or drop to one car since you’re no longer commuting to free up money to fund your retirement.

Bottom line

Use a permanent life insurance policy’s cash value component to partially fund your retirement, though it likely won’t be enough to fully pay for retirement. You can typically withdraw most of the cash value amount on a tax-free basis, and although using the cash value reduces your death benefit, you may need your entire original death benefit amount.

If you’re beginning your retirement planning or want to compare what you currently have, compare permanent life insurance companies to see how they stack up.

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