When most people think of life insurance, they assume its only purpose is to pay a designated beneficiary a lump sum of money upon the insured person’s death. If leveraged correctly, especially during retirement, life insurance can help accomplish so much more than this.

Gain access to cash

Retirement isn’t cheap, and related costs will likely only increase as time marches on—especially when you consider rising healthcare costs and the declining buying power of Social Security. Add to that many surprise expenses that often sneak up on retirees, and supplementing your retirement income can quickly become a necessity rather than a luxury.

A permanent life insurance policy is one way to supplement your retirement savings, with these policies typically allowing you to build or “accrue” cash value (funded by a portion of your premiums) in addition to your death benefit. Think of a cash value insurance policy as an investment-like savings account that includes a death benefit. One distinct advantage is the ability to withdraw from the cash value/savings you’ve built on an as-needed basis and spend the money as you wish.

Remember that drawbacks are associated with withdrawals, so never take these transactions lightly. For example, any amount withdrawn is deducted from your death benefit: thus leaving less for your loved ones. Furthermore, tax implications are possible—especially if you dip into any gains (the value that exceeds your basis or what you had paid in premiums).

You can also borrow against your policy with the same collateral, but these loans are often subject to interest.

Receive accelerated benefits if you get sick

One way you can protect your loved ones in the event of an untimely serious illness is to add an accelerated death benefit rider to your insurance policy. While this practice is most common with respect to permanent life insurance, some insurers also offer them for term policies—sometimes at no extra cost.

More specifically, an accelerated death benefit rider (also sometimes called “living benefits”) is a policy provision that enables you to receive benefits while you’re alive but deemed terminally, critically, or chronically ill. These benefits can help offset financial stressors for you and your family. However, as with life insurance withdrawals, know that any benefits paid for these riders will, in turn, reduce your death benefit payout.

Among different types of accelerated death benefit riders, some of the most common include:

• A terminal illness rider, which allows you to receive a portion of your life insurance death benefit if your documented life expectancy is (typically) two years or less (per a physician’s diagnosis)

• A critical illness rider, which typically covers conditions such as cancer, coronary artery bypass, heart attack, and paralysis—among others—and often triggers when the insured is unable to perform at least two ADLs (activities of daily living): including bathing, continence, dressing, eating, toileting, and transferring (walking or moving oneself from a bed)

• A chronic illness rider, which allows you to access benefits to mitigate costs associated with chronic conditions (and is triggered when the insured cannot perform at least two of the above-mentioned ADLs, akin to critical illness)

Long-term care riders are also available to help cover related expenses for individuals who need assistance with two or more ADLs. However, keep in mind these are often the most expensive riders added to a policy.

That said, an LTC rider’s significant advantage over a standalone policy is that it still pays the death benefit even if you never use the care benefit. In contrast, standalone policies can feel like wasted money if you never file a claim.

Protect your income

Life insurance isn’t only critical during your working years; it’s also important during retirement. For example, if both spouses earn Social Security income and one of them passes away, one SS benefit will inherently dissipate: leaving an income gap. Fortunately, life insurance can close this gap so that the living spouse can maintain his or her current standard of living throughout retirement.

Enjoy an investment opportunity

As mentioned, a permanent life insurance policy offers a cash value component: meaning a portion of your premiums is placed into an investment account that grows over time. It also means that growth is tax-deferred; you won’t pay taxes on interest, dividends, or capital gains on the cash value portion until you make a withdraw. Therefore, investing in a permanent life insurance policy can make sense if you max out your contributions to other retirement vehicles: such as your IRA and 401(k).

Transfer wealth

Life insurance is also an efficient way to transfer wealth, as death benefits paid are typically income-tax-free and possibly estate-tax-free (if structured correctly).

This feature is primarily important when estates include illiquid assets, such as a family business that must be passed down. If your heirs are not expected to become involved in a family business, a life insurance death benefit can play a significant role as an equalizing transfer of wealth.

Engage in charitable giving

Many people who want to leave a legacy by giving more to charity can utilize their life insurance policy as a viable vehicle to do so. While many methods for donating or gifting your policy exist (tax implications vary), the simplest strategy is adding a charitable giving rider to your policy: enabling you to pay a specific percentage of the policy’s value to a qualified charity. Just keep in mind limitations are often placed on the allowable amount you can gift.

Life insurance & retirement: the bottom line

After reviewing this post, it’s easy to see how life insurance can benefit your retirement years in multiple ways. Perhaps you’re wondering if you should purchase a new life insurance policy or update an existing one. These are all good thoughts to ponder, but as with anything, no easy answer exists as situations differ. Speaking with a certified financial planner can help you navigate your own unique circumstances and identify which types of insurance best fit into your overall retirement plan.

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Vision Retirement is an independent registered advisor (RIA) firm headquartered in Ridgewood, New Jersey. Launched in 2006 to better help people prepare for retirement and feel more confident in their decision-making, our firm’s mission is to provide clients with clarity and guidance so they can enjoy a comfortable and stress-free retirement. To schedule a no-obligation consultation with one of our financial advisors, please click here.

Disclosures:
This material contains only general descriptions and is not a solicitation to sell any insurance product or security, nor is it intended as any financial or tax advice. For information about specific insurance needs or situations, contact your insurance agent. This article is intended to assist in educating you about insurance generally and not to provide personal service. They may not take into account your personal characteristics such as budget, assets, risk tolerance, family situation or activities which may affect the type of insurance that would be right for you. In addition, state insurance laws and insurance underwriting rules may affect available coverage and its costs. Guarantees are based on the claims paying ability of the issuing company. If you need more information or would like personal advice you should consult an insurance professional. You may also visit your state’s insurance department for more information. Riders are additional guarantee options that are available to an annuity or life insurance contract holder. While some riders are part of an existing contract, many others may carry additional fees, charges and restrictions, and the policy holder should review their contract carefully before purchasing. Guarantees are based on the claims paying ability of the issuing insurance company.

Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Vision Retirement, a registered investment advisor and separate entity from LPL Financial.