If you have a life insurance policy, you probably bought it because you’re thinking about how it will benefit your survivors after you’re gone.
What you may not know is life insurance can help you while you’re very much alive. Believe it or not, a life insurance policy can provide an extra way to pay for your retirement – and that’s something worth knowing, especially if your other investments don’t hold up or you don’t have a pension.
As morbid as it may sound, not all of us make it to our deaths before a financial need for the money arises. Often times death is not as sudden as we imagine, and there are a number of reasons that contribute to needing the money while you are still alive. You may find it beneficial cashing out life insurance while you are still alive.
Also, over the years, a person pays premiums into a permanent life insurance policy with the intent to provide a death benefit as well as cash-value accumulation for as long as the policy remains in force.
But let’s say they reach retirement and, for whatever personal reasons, they aren’t as concerned as they once were with using the policy as a death benefit. They can withdraw from the insurance policy without paying taxes. Usually, you can withdraw up to the amount that you paid in premiums over the years.
But why go this route when you could just contribute to a 401(k) or an IRA? Certainly, those represent great ways to save for retirement and you’ll want to make use of them right along with your life insurance policy. Life insurance, though, does come with some advantages that more traditional retirement-savings vehicles don’t. Here are a few:
- Contribution limits don’t apply. The government puts a limit on how much money you’re allowed to contribute each year to an IRA. So your IRA is going to grow, but perhaps not to the degree that you would like. If you structure a life insurance policy so that it’s part of your retirement plan you don’t face those same dollar-amount limits.
- The cash value of the policy grows each year with interest, tax deferred. Investing in or purchasing a tax-deferred vehicle means your money can compound interest for years, free from income taxes, potentially allowing it to grow at a faster rate. And if you’re worried about the stability of the insurance company, the fact is insurance companies are some of the strongest financial institutions in the world.
- When you leave your children the money you’ve accumulated in an IRA, they have to pay taxes on it. But the beneficiaries of a life insurance policy don’t have to pay taxes on the insurance payout.
- The federal government will penalize you if you withdraw money from an IRA or a 401(k) before you turn 59½. But if you need some of that life insurance money at an earlier age, you can withdraw without paying a penalty. That’s a big advantage for those who suddenly find themselves in need of cash, but who prefer to keep as much of their retirement savings as possible out of Uncle Sam’s hands.
It’s important to take advantage of all the options you can when it comes to planning for retirement. Many people underestimate how much money they’ll need when they retire, often because they don’t take into account all the factors like taxes and inflation. Maybe you’d never have to tap into that life insurance policy and it can all go to your beneficiaries. But it’s also nice to have it there in case the need arises.
