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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:

  • Whole life insurance has a cash value that increases at a set interest rate decided by the insurance provider.
  • Universal life insurance cash value growth depends on how much you pay in premiums, which are generally flexible for these policies.
  • Variable life insurance allows policy owners to invest their cash value in different options managed by the insurance provider. The earnings from the investment add to the cash value and death benefit; however, growth is tied to market performance and allows for the possibility of losing value.

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.

To find a plan with benefits that best fit your needs, you can call 800-954-3301 or select a button below.
This article may contain links to third party websites, but American Republic Insurance Services is neither responsible nor liable for their content, accuracy, or security. Review our Terms and Conditions to learn more.

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