Your life insurance policy and your retirement plan have two separate roles in your life. Of course, the retirement plan takes care of you, whereas the life insurance policy is for your beneficiaries. But is that completely true?
With 47% of Americans fearing the growing cost of living as their number one financial threat, wouldn’t it be nice to find new ways to supplement your retirement income?
Your life insurance can actually help support your retirement plan. Permanent life insurance plans give you the chance to do this, but at a cost. Here’s how.
HOW CAN A LIFE INSURANCE POLICY SUPPLEMENT RETIREMENT INCOME?
A life insurance policy can do more than make a payout to your beneficiaries. When you purchase a permanent life insurance plan, you get the chance to put some of your premium away. Some of it goes to your insurance expenses, but the remainder goes into a cash value account.
The account is tax-deferred and acts similarly to a savings vehicle. Your policy determines how much goes in per premium payment. But after you build up enough, you can access the funds. This money has a number of uses. It’s possible to put them towards college expenses, help you minimize your taxes, or ride out market downturns.
However, it’s a costly investment. Speak to a financial advisor before you pursue any of these options.
TYPES OF PERMANENT LIFE INSURANCE
You can choose from four types of permanent life insurance: universal life, variable life, variable universal life, and whole life. Each ensures you receive a death benefit and cash value.
Universal life (UL) insurance is well-known for its low premium options, similar to term life insurance. They come with a minimum interest rate, with the average policy’s savings rate sitting around 3- to 4%.
ULs also offer flexible premium options. So, when your budget is tight, you can pay a little less. Likewise, when you have a few extra dollars, you can pay more. Of course, some may be different and require a sing lump-sum premium or a scheduled fixed one.
Variable life (VL) differs from ULs: they have fixed premiums. However, the premium invests into multiple sub-accounts, similar to a mutual fund. The number varies on the policy, but it can offer up to and over 50 options. These sub-accounts are only available within this type of policy.
You can find all the expenses related to these investments, along with fees and charges, in the documents you receive when you purchase the policy.
Keep in mind: the cash value of the account depends on how well these investments do. So, there’s potential risk.
VARIABLE UNIVERSAL LIFE
Variable universal life (VUL) combines the above two accounts together. It uses UL’s adjustable premiums and VL’s investment strategy. Each investment comes with a unique level of risk and benefit, allowing you to customize. They also usually have minimum and maximum limits for your investments’ return.
They come with the same potential risk as VL, but also flexibility. You can increase your premiums and, therefore, your cash value, or you can use your cash value to cover policy costs. It’s possible to change the policy’s terms if your needs change in the future, though.
This is the most accessible and simple option for policyholders. In addition, there’s very little risk. Premiums stay the same the whole time. Also, the policy guarantees you an amount for both your cash value and death benefit.
You can withdraw funds from your cash value tax-free up the amount you paid in premiums overall. But unpaid loans will lower your death benefit.