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.
- 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.
What is life insurance? A quick and simple guide
Get answers to common questions about life insurance and learn key terms
With a variety of types and plans, life insurance may seem confusing. Whole life insurance, term insurance, permanent life insurance, burial insurance — knowing the difference among these options can help you make informed purchasing and planning decisions. One way to get started is to break down commonly asked questions and define important terms. Then you can understand what life insurance is and choose which option is best for you and your family.
Life insurance FAQ
What is life insurance?
Life insurance is a legally binding contract that guarantees a benefit upon your death to named beneficiaries in exchange for premiums you pay. Types of life insurance include term and whole life insurance.
- Term life insurance is purchased for a specific time period and protects your loved ones from income loss after your passing.
- Whole life insurance is a type of permanent life insurance that covers you while you’re alive for as long as you pay your premiums. A whole life insurance policy won’t expire after a certain term.
Which is better: Term or whole life insurance?
The better option between term or whole life insurance depends on what stage of life you’re in.
As you age, your needs for life insurance change. If you’re older, a whole life policy may be right for you. Whole life insurance is easier to obtain than term life insurance because you aren’t required to take a health exam. The premiums for whole life insurance are often higher than term policies, but whole life policies hold cash value that you have access to while you’re living.
Term life insurance offers lower premiums and a greater death benefit, but it holds no cash value, and your policy expires if you haven’t passed away before a given time. You may be able to renew your term insurance policy, but premiums typically increase to reflect your current age.
Is life insurance taxable?
Life insurance premiums are considered personal expenses, which are not tax deductible. This means the money you pay into your life insurance policy may be taxable income subject to standard tax rates.
According to the Internal Revenue Service, if someone else names you a beneficiary, the proceeds you receive from his or her life insurance are not taxable income.
Is burial insurance the same as life insurance?
Burial insurance is just one type of permanent life insurance, and it’s intended to cover funeral or cremation costs. Burial insurance can be purchased as a term or whole life policy, with benefits paid to your beneficiary. Since your beneficiary can use the benefit funds in any way, you could name a funeral home as your beneficiary to ensure the funds are used for death-related expenses.
Life insurance is a broader term that encompasses the total policy you pay into in exchange for a death benefit, not just funeral expense coverage.
Key life insurance terms
What is permanent life insurance?
Permanent life insurance often is called whole life insurance and refers to coverage that’s active for the duration of your life, with a benefit to be paid to your beneficiary after your passing. Different types of permanent life insurance include traditional, universal, and final expense.
These types of life insurance allow you to set aside money for any of your final expenses, from medical bills to your funeral, and your beneficiary decides how to allocate it.
What’s the difference between guaranteed assurance and guaranteed funeral plans?
Guaranteed assurance is the life insurance plan you qualify for without having to undergo a health assessment.
A guaranteed funeral plan refers to the cost of funeral services determined in a contract for permanent life insurance, which cannot increase due to inflation.
What’s a rider?
A rider is an addendum to a life insurance policy that either extends or limits its benefits.
What’s the difference between a death benefit and an accelerated death benefit?
A death benefit is awarded to a beneficiary after you, the policyholder, pass away.
An accelerated benefit can be paid out while you’re still living, but this will decrease the benefit paid to your beneficiary after your death.
Decoding 3 types of life insurance death benefits
Learn the differences between accelerated, level, and limited death benefits
Life insurance helps financially take care of your family and loved ones in the event of your death. Understanding the different types of life insurance and the death benefits they offer can help you choose which insurance plan is best for you.
A death benefit is the amount of money that will be paid upon the death of the insured, but it can be paid out in different ways. Here we explain accelerated death benefits, level death benefits, and limited death benefits.
What is an accelerated death benefit?
Also known as a living benefit or terminal illness benefit, an accelerated death benefit (ADB) allows you to receive a cash advance on your death benefit while you’re still alive. The money you receive from ADBs can be used for medical or living expenses or to help relieve your loved ones of financial burdens, such as paying off debt during your final years.
Accelerated death benefits give you a little bit of added security, knowing that if you have expenses prior to death, you can access some of your death benefits to pay for them.
Typically, you can become eligible for accelerated death benefits if you meet any of the following criteria:
- You’ve been diagnosed with a terminal illness and are expected to die within two years.
- Your life expectancy has been reduced, typically due to a critical illness, such as cancer, a heart attack, stroke, kidney failure, paralysis, coma, or amyotrophic lateral sclerosis (ALS or Lou Gehrig’s disease).
- You have a chronic illness that requires assistance with activities of daily living, which include bathing, eating, getting dressed, toileting, and transferring.
- You need an organ transplant because of an illness.
- You are confined to hospice care or a nursing home facility.
Accelerated death benefits can be paid in a lump sum or in installments. The form of payment you receive matters, because receiving death benefits could impact your tax liability, affect your eligibility for Medicaid, or have other implications for you or your beneficiaries — the people you choose to receive your death benefits after you die.
Accelerated death benefits aren’t borrowed or loaned. Instead, the amount of money you receive is deducted from your death benefit, which reduces the amount of financial support your loved ones will have to cover your funeral or other expenses after you die.
What is a level death benefit?
Life insurance companies offer level death benefits that pay the same amount to your beneficiaries after your death, regardless of when you purchased the life insurance policy. The premiums for level death benefits are typically cheaper than life insurance policies with increasing — or graded — death benefits. If you’re over the age of 60, when premiums for life insurance policies typically increase, the lower premiums for a life insurance policy with level death benefits may make sense for you.
To qualify for level death benefits, you generally have to show you’re in good health by answering a few health questions and survive the first two policy years. If you don’t qualify for level death benefits with first-day coverage, you can still be issued you a life insurance policy, but it may have a limited death benefit.
What is a limited death benefit?
Limited death benefits restrict the amount of life insurance coverage you have for a certain period of time. If you’re not healthy, you can typically still purchase a life insurance policy with a limited death benefit, and if you survive a predetermined number of years, you may qualify for full coverage.
Which death benefit is best for you and your loved ones?
A lot of factors should be taken into consideration to determine what is best for you and the beneficiaries who will receive your death benefits. An American Republic Insurance Services agent will look at your situation to help find the best product that provides the death benefit you want at a price you can afford.
3 reasons why you should own life insurance
Hint: It not only covers funeral expenses
When you think about life insurance, you automatically think about the funeral expenses it will cover after you’re gone. But that’s not the only reason why you should own life insurance. When you’re contemplating whether to buy a plan, consider these three reasons why you should own life insurance:
1. Cover final expenses
A life insurance plan ensures your loved ones aren’t left with a financial burden after you’re gone. Funerals alone can average $7,000 to $8,000, so covering these costs will reduce financial stress on both you and your loved ones. Whole life, term, universal life, or final expense insurance can help further because they’re not limited to covering funeral costs. Depending on your policy, it can pay medical bills, mortgage payments, and more. Your family can dispense the money toward expenses as you advise or as they see fit.
2. Leave something to remember
Do you want to give money to your kids or grandkids after you pass? A life insurance policy allows you to leave behind money for whomever you choose. You can designate policy beneficiaries to receive the tax-free death benefit after your passing.
3. Replace lost income
If you have dependents who rely on your income, you want to make sure they’re taken care of when you’re gone. Depending on the amount of your life insurance policy, the death benefit can act as a replacement for your dependents’ lost income or even help your surviving spouse supplement Social Security.