Can I use life insurance to save for retirement?

If you’re close to retirement and already have a life insurance policy with sufficient cash value, you can use that cash to save for retirement. But if you’re young and looking for a savings program for your retirement, there may be better ways than using life insurance.

Life insurance is designed to protect against unexpected economic loss, so if you don’t need a death benefit, you might want to look into a tax-sheltered program such as a 401(k) that is specifically designed for long-term savings. This is particularly true if you’re still young and will continue working.

If you need death benefit protection and tax-sheltered growth on your savings, cash value life insurance is one tool you might consider using as part of your overall savings plan for retirement.

If you already have a life insurance policy with a cash value account, you can use the cash in any of the following ways:

  • Surrender the policy, take all the cash from it, and put the cash into an annuity. Set this up so you’ll receive regular payments. Your life insurance policy is then no longer in force.
  • Take a portion of the cash value and put it into an annuity. You can receive regular payments from your annuity and still have some life insurance protection. The amount you take out of the cash value would be subtracted from the life insurance benefit. For example, if your life insurance benefit is $100,000 and you have a cash value of $30,000, you could put $20,000 from your cash value account into an annuity. Your insurance benefit would then change to $80,000 ($100,000 – $20,000 = $80,000). Your ability to take some of the cash value will depend on the type of policy you have and how long you have paid into it.
  • Take a loan from the cash value account. You would pay interest, which would be added to your premium. You can repay the loan, but if you don’t, the loan balance plus interest owed will be deducted from the insurance benefit at your death.

Before taking any of these steps, you’ll want to discuss your retirement savings program with a trusted financial advisor.

Woman holding paper with older man in front of a laptop screenPermanent life insurance

Permanent life insurance offers lifetime protection and a guaranteed death benefit as long as you keep the policy in force by paying the premiums. A portion of the permanent life insurance premium goes into a cash value account, which accumulates on a tax-deferred basis throughout the life of the policy. You may be able to use this portion of the life insurance to save for retirement. Withdrawals of the accumulated cash value, up to the amount of the premiums paid, are not subject to income tax. Loans are also free of income tax as long as they are repaid. Loans and withdrawals from a permanent life insurance policy will reduce the policy’s cash value and death benefit. could increase the chance that the policy will lapse, and might result in a tax liability if the policy terminates before the death of the insured.

Additional out-of-pocket payments may be needed if actual dividends or investment returns decrease, if you withdraw policy cash values, or if current charges increase. Any guarantees are contingent on the claims-paying ability and financial strength of the issuing insurance company. As with most financial decisions, there are expenses associated with the purchase of life insurance. Policies commonly have mortality and expense charges. If a policy is surrendered prematurely, there may also be surrender charges and income tax implications.

Generally, annuity contracts have fees and expenses, limitations, exclusions, holding periods, termination provisions, and terms for keeping the annuity in force. Most annuities have surrender charges that are assessed if the contract owner surrenders the annuity. Withdrawals of annuity earnings are taxed as ordinary income. Withdrawals prior to age 59½ may be subject to a 10% federal income tax penalty. Any guarantees are contingent on the claims-paying ability and financial strength of the issuing insurance company.

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