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5 Ways Permanent Life Insurance Can Help You in Retirement

Policy options can boost financial security while you’re alive as well as pay benefits when you die

spinner image floating life preserver rings with one white and many red rings
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The main purpose of buying life insurance is to provide a lump sum of cash to your loved ones when you die — but the right policy can offer far more than that.

There are two main types of life insurance: term and permanent. Term life costs considerably less, but it only lasts for a set period, such as 20 or 30 years, and provides only a death benefit, which your survivors get if you die during the policy term. 

Permanent life insurance, which includes whole life and universal life, remains in force your entire life — and it offers numerous features and options that can be strategically utilized to boost retirement security while you’re still alive, as well as aid your beneficiaries when you’re gone.

Here’s a look at some lesser-known benefits of permanent life insurance.

1. Get cash now

Unlike term insurance, permanent life insurance offers a savings component, one that increases in value over time.

“One of the biggest benefits of permanent life insurance is that, as a policy matures, the cash value grows and that cash becomes easily available for any reason,” says Lyndsey Monahan, a chartered financial consultant and founder of the Dallas-based financial planning firm Women Inspire Wealth. 

You can borrow against the cash value of a permanent life policy — in effect, loaning money to yourself — or make a withdrawal, which does not need to be repaid.

Consider the difference if you were to go to a bank for cash or a loan: You’d have to make lots of financial disclosures and qualify for the money. Not so when you tap the cash value of life insurance. “Not a lot of questions get asked, and there’s no application for it,” Monahan says. 

There are potential downsides to accessing your policy’s cash value. Any withdrawal, or any loan balance still outstanding when you die, reduces the benefit amount left to your heirs. Also, if you opt to cancel the policy, you can receive the accrued cash value but may have to pay a fee, known as a surrender charge. 

2. Get ongoing retirement income

Some whole life policies allow you to receive a regular payment rather than taking a lump-sum distribution. That steady stream of cash could supplement your Social Security benefit or other retirement income, and it’s generally tax-free, provided the amount of funds you receive do not exceed the premiums you’ve paid for the policy.

Beware of two caveats, though. First, under IRS rules, not every permanent life insurance policy can provide this ongoing income option. “It matters how the policy is structured,” Monahan says. Ask your agent if a policy you are considering or already own qualifies.

Second, the payments you receive over time come out of the death benefit. Say you have a $500,000 whole life policy, and your daughter is the sole beneficiary. Then assume you convert a portion of the death benefit into a $1,000 monthly payout for yourself. If you did that for 10 years before dying, you would have tapped into $120,000 worth of your policy’s cash value, and your daughter would receive $380,000.

3. Cover costs of long-term or critical care

“A common misconception is that insurance policies are just like they’ve always been,” Monahan says. “But there’s actually been a ton of change in the industry. Hybrid life insurance that can also pay for long-term care — those are relatively new products.”

Hybrid policies, a form of permanent life insurance, allow policyholders to convert their cash value to use in paying for nursing home care or skilled nursing in your home. That can help you address a major financial gap many retirees face.

According to insurance provider Genworth, which tracks long-term care expenses, the median annual cost of living in a nursing home in 2021 was $94,900 for a semiprivate room and $108,405 for a private room. By 2030, the company forecasts, those costs will rise to $123,823 and $141,444, respectively.

About half of nursing home residents are there for at least a year, and more than 1 in 5 stay for nearly five years, according to the Health in Aging Foundation.

You could also buy a permanent life policy with an accelerated death benefit rider. With this provision, you can tap into the death benefit “to pay for any terminal, critical or chronic life event,” says Rex Jackson, an accredited investment fiduciary and founder of IE Invests in Redlands, California.  

“You get the funds 100 percent tax-free,” he says, “without having to destroy your 401(k), touch other accumulated assets or sell a home you’re trying to hang onto.”

4. Draw dividends

Just as people who buy preferred stock can get dividend payments, so, too, can owners of whole life policies get annual dividends. These typically are policies sold by mutual insurance companies, which are owned by policyholders. 

You have multiple options for using your dividends. You can take them in cash, apply them to your premium payments, reinvest them in your policy to build cash value at a faster clip, or plow them into purchasing additional coverage to leave a bigger death benefit for your loved ones. 

5. Secure tax benefits

The cash value in a permanent life policy grows on a tax-deferred basis, and in most situations you can access it tax-free.

Money you take out as a loan from your life insurance is not taxed as long as the policy remains in force. Money you withdraw, whether on a lump-sum basis or as a monthly income stream, isn’t taxable either, as long as the payouts are less than the total premiums you’ve paid for the policy. 

Furthermore, your beneficiaries don’t owe income taxes on the insurance payout they get after you die. 

Dividends you draw from a whole life policy are tax-free, too — again, as long as they don’t exceed your premium payments. Under tax law, they are not treated as income, but as overpaid premiums being refunded to policyholders. If the dividends are greater than your total premium payments, however, the excess is taxable.

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