How to use life insurance to supplement retirement income

The living perk of owning whole life insurance

Life insurance, while primarily used to protect your loved ones after you've passed, can also be used to supplement your retirement income. Many types of permanent life insurance policies, such as Final Expense insurance, include cash value accounts that you can use as a source of funds. Using permanent life insurance cash value to supplement your income may be a good fit for some individuals, but not others — it all depends on your financial situation.

What is cash value?

Permanent life insurance policies have a cash value account that you can access during retirement to supplement your income. Your cash value grows in a separate account within your policy, and part of your premium payments is allocated to this cash value account. However, the rate at which this account grows depends on both your insurance provider and the type of policy that you own. The cash value also grows tax-deferred, which means that it’s only taxed upon withdrawal. Additionally, the taxes taken out are only up to the cost basis, which doesn’t include any of the tax-deferred investment gains. You can withdraw from your cash value for any need, such as paying an overdue bill or simply supplementing your retirement income.

What types of insurance policies accumulate cash values?

If you plan to use a life insurance’s cash value to supplement your income or fund something else, it's crucial to understand the distinct types of policies that have cash values and how their cash values grow. The following are a few common permanent life insurance policies, plus information on how they accumulate cash values:

How can I use my cash value?

Often, unexpected costs and financial needs arise that you didn’t plan for, but fortunately, with life insurance cash values, you have a source of funds at your disposal. By using your cash value, you won’t have to draw from your savings or limited income. However, it’s necessary to understand how your policy works because this could reduce your death benefit.1

In some cases, you can use your cash value to pay your policy’s premiums. Once you’ve allowed the account to accumulate enough funds to cover your premiums, you won't have to worry about using your retirement savings or spending cash for payments.

If you’re at the point in your life where you have a significant cash value and don't have any plans for it, you may be able to transfer this cash value to your death benefit, so that your beneficiaries will have a greater payout.

Lastly, some insurance companies pay policy owners dividends annually. These dividends are non-taxable because they’re considered a return of your policy, rather than a traditional dividend. This extra cash can help supplement your retirement income without taking away from your death benefit.

No matter how you plan to use the cash value associated with your permanent life insurance policy, it’s important to understand both your insurance provider and policy, because some offer more benefits and riders than others.

  1. Withdrawals could reduce your death benefit, cause your premiums to increase based on the timing/amount of the withdrawal, cause your policy to lapse, or you may have a cash surrender fee. Not all withdrawals may be tax-free. Rules depend on the specific policy purchased.

Get answers to your questions

Are you unsure whether original Medicare or Medicare Advantage is right for your retirement plans? Would you like to learn how supplemental health insurance can help round out your insurance coverage in retirement? An American Republic Insurance Services® agent is your best retirement insurance resource. Call 800-954-3301 for immediate answers or select the button below to find an agent near you.

It’s important to learn what Medicare is when retirement planning

Understanding what Medicare does and doesn’t cover affects retirement insurance planning

An essential part of planning for retirement is often overlooked. Even though health care is typically one of the largest expenses for retirees, most planners don’t prepare for it because they assume Medicare will cover all their expenses. Unfortunately, Medicare doesn’t cover everything.

To make sure you’re not caught unprepared for insurance coverage in retirement, read this quick guide to understand what Medicare is and what it covers.

What is Medicare?

Medicare is a federal health insurance program. It’s managed by the Center for Medicare and Medicaid Services (CMS) under the Department of Health and Human Services (HHS). All U.S. citizens become eligible for Medicare when they reach age 65; however, individuals with disabilities or end-stage renal disease who are under age 65 also have Medicare eligibility.

Parts of Medicare

Medicare has four parts — Part A, Part B, Part C, and Part D — and each covers different expenses.

Part A: Original Medicare hospital insurance

Medicare Part A is part of the federal, original Medicare through CMS. It provides coverage for inpatient hospital stays, care in a skilled nursing facility, nursing home care, hospice care, and home health care. Some of these services may have exceptions and may not be fully covered. Supplemental insurance, such as Hospital Indemnity and Medicare Supplement insurance, can help fill Part A gaps.

Most people don’t need to pay for Medicare Part A if they paid Medicare taxes for a certain amount of time while working. But if you don't qualify for premium-free Part A, you can buy it and pay a monthly premium. If you choose not to buy Part A, you can still buy Part B. But in most cases, if you choose to buy Part A, you must also buy Medicare Part B. Contact Social Security for more information about the Part A premium.

Part B: Original Medicare medical insurance

Medicare Part B is also part of the federal, original Medicare through CMS. It’s used to cover medically necessary services and preventive health care. It has a monthly premium that is determined by your income. After its deductible is met, coinsurance is 20% of the Medicare-approved amount for most services. Purchasing Medicare Supplement or Dental insurance can help fill Part B gaps.

Part C: Medicare Advantage

Medicare Part C — also known as Medicare Advantage — provides both Part A and Part B coverage and is sold by Medicare-approved private insurance companies that must follow rules set by Medicare. Medicare Advantage costs and benefits vary. Some plans may include additional benefits for dental, hearing, vision, and/or health and wellness programs. Most Part C plans also include Medicare Part D, but not all do. If you purchase a Medicare Advantage plan, then you can’t purchase a Medicare Supplement plan, but you can buy other supplemental health insurance, such as Hospital Indemnity insurance, which has riders that pair well with Medicare Advantage.

Part D: Prescription drug coverage

Medicare Part D covers prescription drug costs. You may pay a premium, annual deductible, copayments, or coinsurance, depending on which plan you choose. Your actual drug coverage costs will vary depending on your prescriptions, pharmacy, and any extra payment assistance you receive.

Signing up for Medicare

You have different ways to sign up, depending on which Medicare parts and plans you want to enroll in. You can enroll in Medicare Parts A and B through Social Security. But if you aren’t already receiving Social Security, then you’ll need to enroll in Medicare yourself. Parts C and D (along with any other supplemental insurance plans) are offered through private insurance companies that follow Medicare guidelines, so you would purchase plans directly through them.

You have a seven-month window in which you can sign up for original Medicare, starting three months before you turn 65 and ending three months after you turn 65. These seven months are called the Initial Enrollment Period, and you can sign up for Medicare Advantage or Part D then too. You can also sign up for Medicare Advantage during the General Enrollment Period or the Annual Enrollment Period. The General Enrollment Period is for individuals who have Part A coverage and sign up for Part B coverage for the first time, thus making them eligible for Medicare Advantage or Part D. The Annual Enrollment Period happens each year from Oct. 15 to Dec. 7, and during that time you can join, switch, or drop a Medicare Advantage or Part D plan.

During the Open Enrollment Period, Jan. 1 to March 31, you can disenroll from a Medicare Advantage plan and enroll in another Medicare Advantage plan, or you can switch back to Original Medicare, with or without Part D prescription drug coverage, if you’re a Medicare Advantage-eligible beneficiary.

Get answers to your Medicare questions

Are you unsure whether original Medicare or Medicare Advantage is right for your retirement plans? Would you like to learn how supplemental health insurance can help round out your insurance coverage in retirement? An American Republic Insurance Services® agent is your best retirement insurance resource. Call 800-954-3301 for immediate answers or select the button below to find an agent near you.