How To Use Life Insurance for Retirement

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It’s not easy thinking about retirement. Making the right choices now may ease you into your golden years. Choosing a life insurance retirement plan plays a role in your long-term financial strategy. The right life insurance policy could help supplement income in retirement, offer peace of mind and financial flexibility.

There are so many life insurance policies out there — which one is the right fit? This guide will help you decide which life insurance is right for you. 

What Are the Different Types of Life Insurance? What To Choose

Choosing life insurance for retirement savings means knowing what options are available to you. Here are some common types of life insurance: 

Term Life Insurance

• Available for 10, 20 and 30-year coverage 
• More affordable than permanent life insurance
• Good for coverage for a limited time
• Does not accumulate cash value
• Expires at the end of the term
• May not be the best choice for long-term financial security in retirement

Whole Life Insurance

• Offers lifelong coverage 
• Includes a saving component known as cash value that grows over time
• Cash value can be accessed through loans or withdrawals 
• Cash value savings can be a source of retirement income
• More expensive 
• Guaranteed death benefit and tax-deferred savings

Universal Life Insurance

• Another form of permanent life insurance
• Flexibility in premium payments
• Availability of death benefits
• Cash value grows based on market performance or fixed interest rate
• Useful for individuals looking for retirement planning focused on protection and investment growth

Indexed Universal Life Insurance

• Cash value is connected to the stock market index
• Potential for high returns compared to whole or traditional universal life
• Good fit for retirees looking for growth opportunities, tax advantages and financial protection

Variable Life Insurance

• Permanent policy that allows  investing cash in various sub-accounts (like mutual funds)
• Policy value fluctuates with market performance
• Higher risk but offers higher potential gains 
• Works for individuals who are comfortable with investment risk 

Benefits of Life Insurance

Life insurance is typically considered a benefit for your beneficiaries after you pass. However,  a life insurance policy has advantages during your retirement. These are some of the benefits of a life insurance policy during retirement:

Supplemental Retirement Income

Whole and universal life insurance policies accrue cash value over time. This cash value is accessible during retirement. You can take out loans or withdraw from the cash value for medical bills or living costs. Leaning on the cash value prevents you from tapping into your savings. 

Tax-Deferred Cash Value Growth

The cash value of a life insurance policy grows tax-free. As long as the money remains in the policy, the funds are tax-deferred similar to a 401(k) and IRA. You will not incur a withdrawal penalty or be required to take minimum distributions.

Insurance Against Market Volatility

Indexed Universal Life, or IUL, can protect your savings from market downturns. With IUL policies, your cash value grows based on the performance of a market index.  A floor prevents loss when the market declines. This can be a more stable way to grow your wealth while protecting your principal. In retirement, the protection of your savings is critical. 

Flexibility In Premium Payments

Universal life insurance offers flexible premium payments. If you accumulated enough cash value, you can use those funds to pay the premiums. You don’t have to worry about maintaining coverage. This is handy if your retirement income fluctuates or you are on a fixed income. 

Long-Term Care and Chronic Illness Benefits 

Many life insurance policies offer riders for illnesses. You can use a portion of the death benefit to pay for long-term care or chronic illness instead of tapping into your retirement savings.  

5 Strategies for Choosing the Right Life Insurance 

Every individual’s retirement is different, so you must focus on the right strategy for your situation. Here are some ways to evaluate the right life insurance for your retirement. 

1. Assess Your Financial Goals and Needs

You need to ask yourself how life insurance could help during retirement. Some of these goals may include the following: 

• To provide income replacement for a spouse or dependents
• To cover funeral costs and medical bills
• Leave a legacy for heirs or charitable contributions  
• Protect your estate from taxes
• Use cash value to supplement retirement income

Understanding your why will help make the right choice for life insurance in retirement. 

2. Evaluate the Duration of Coverage 

Decide if you want term or permanent life insurance coverage. 

Term life coverage could cover financial obligations like a mortgage or provide income replacement during early retirement. Term policies are generally more affordable but expire at the end of the term.

A permanent life insurance policy is ideal for coverage for your entire life. In these cases, permanent policies such as whole life, universal life or indexed universal life (IUL) are better suited during retirement. These policies also accumulate cash value that can be accessed during retirement, making them a tool for income supplementation.

3. Know Your Health

Choosing the life insurance you need depends on your age and health. If you’re in good health, you may qualify for lower rates. If you have a preexisting condition, you may want to consider permanent life insurance. This type of insurance allows for cash value and guarantees lifetime coverage. 

4. Analyze Cash Value Potential

If you’re looking for life insurance as a way to supplement income during retirement, look at how the cash value component of the life insurance policy works. 

• Whole Life Insurance: Offers guaranteed cash value growth that accumulates at a steady rate. 
• Universal Life Insurance: Offers more flexibility with cash value growth based on a fixed interest rate or market performance.
• Indexed Universal Life: Links the cash value growth to a stock market index with the potential for higher returns. It also includes a safety net to protect against market losses.

For retirees who seek supplemental income during retirement, the cash value addition is appealing to their financial plan. 

5. Talk to a Financial Advisor

A financial advisor can look at your individual financial situation and help you answer questions like how do you use term life insurance for retirement. 

The Most Common Misconceptions About Life Insurance

There are common misconceptions when it comes to looking at life insurance as a tool in retirement. Here’s a look at a few: 

• I have no need for life insurance in my retirement years. 

Life insurance can serve multiple purposes in retirement. It can provide financial support for a surviving spouse and dependents. The cash value of life insurance policies can help supplement retirement income. It is also helpful to cover final expenses and outstanding medical bills. 

• I am too old for life insurance.

Older people assume they cannot get life insurance when they turn 60 or 70. Guaranteed life insurance is available for individuals who don’t want a medical exam. It typically comes with higher premiums and fewer benefits. final expenses insurance is available for older adults to cover funeral expenses and burial costs. 

• My savings is enough. I don’t need life insurance. 

Even with a savings account, life insurance can provide benefits in retirement. First, if your spouse relies on your retirement income or Social Security benefits, life insurance can replace lost income in the event of your death. Second, life insurance death benefits are generally tax-free, while withdrawals from retirement accounts like 401(k)s or IRAs may be subject to taxes. Life insurance can be a more tax-efficient way to leave a legacy. Lastly, life insurance can provide liquidity to cover estate taxes or lessen the need to sell assets quickly.

• I cannot access my life insurance benefits during my lifetime.

Some people assume life insurance benefits their loved ones only after they pass. This isn’t true. Permanent life insurance allows you to access the cash value of the policy while you’re alive. You can use these funds as a source of income to pay for medical expenses, and cover long-term costs. 

Final Take

Life insurance in retirement is an often overlooked tool. The truth is it can provide supplemental income during retirement without having to tap into savings. There are tax advantages and it helps to protect you from unforeseen expenses. You can also purchase life insurance that is customized to your needs. 

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