Life insurance is mainly purchased to leave a legacy behind for the nominee of the policy. However, life insurance can be incorporated to fund retirement to make retiring a more financially secure decision. An effective way to do so is to buy a simple term policy with an adequate death benefit. A term life policy gives the most value for the money. Here’s how the life insurance policy can benefit financing the retirement:
All insurance policies cannot provide a source of supplemental retirement income. Permanent insurance can provide an alternative to the retirement income, and this includes whole life, universal, and variable life insurance policies. As long as the policyholder makes the premiums payments, these policies build up cash value with time; some permanent insurance policies are eligible for dividends too.
The cash value amount can be withdrawn or borrowed by the policyholder when in need. Furthermore, the interest rates on cash value loans from insurance policies may be ideal than those available for personal loans. However, tapping the cash value of the term policy may reduce the value of the remaining cash as well as death benefits.
The value of equity investments and retirement accounts can fluctuate, and this may impact those depending on these investments for retirement funds. As during the market rundown, the equity-based retirement may reduce the amount of principal of the future returns based on it. And to avoid the impact of market fluctuations on the retirement funds the term insurance plans can be effective.
One of the main advantages of buying a permanent life insurance policy to fund retirement is that the cash value amount withdrawn from the policy is not subject to taxes up to the “cost basis”. The policyholder can build up cash by adding to it the entire time of the policy length on a tax-deferred basis. The premiums paid by the insurance carrier are returned as dividends, and they are only taxable if the dividends exceed premiums paid. No taxes are charged until the policy is surrendered.
If the policyholder chooses to keep the policy going for the tax-deferred income or death benefit, the dividends earned may be further used to pay for the premium of the online term plan. Thus, freeing up some additional cash from the budget.
Many carriers allow the policyholder to surrender the permanent product and use the cash to purchase a life annuity. If there are no tax implications, this can prove to be an effective strategy.