Life is unpredictable, but there are ways you could prepare for the uncertainties of life. Would your loved ones be able to stay afloat financially if you passed away unexpectedly? The death benefit life insurance offers could help provide a financial cushion for this worst-case scenario. In addition to the death benefit, permanent life insurance also provides cash value.
When someone retires, some employers throw a big going-away party and give the retiree a gift to remember their lifetime of work. If you've been paying into a permanent life insurance policy, such as whole life or universal life, you may have already prepared your own going-away gift. Your policy may have built cash value that you could enjoy in retirement — but what could you do with it?
Enjoying Your Golden Years
Your life insurance policy could become another source of retirement income. If you want a fixed monthly budget, for example, you could set up your policy so that it makes regular withdrawals from the cash value and transfers the money directly into your bank account. You could also make withdrawals whenever you want — for whatever reason — by contacting your insurance company. This is different from term life insurance. While generally less expensive than permanent life insurance, term life insurance does not build cash value gradually over time.
However, it is important to note that these withdrawals would reduce the size of the death benefit — and could also generate an income tax liability, reduce the account value and may cause the policy to lapse. A financial representative can run simulations to calculate how much you could safely pay yourself each year to help ensure the cash value lasts throughout your retirement.
You could also take out cash value as a loan rather than as a withdrawal. This option could help you avoid owing income tax when you take out your earnings. But what happens if you pass away before paying off a cash value loan? The death benefit from your life insurance policy will pay off the loan and your loved ones will receive the remaining amount. However, it is also important to remember that loans also accrue interest.
The Annuity Option
Another way you could turn your cash value into income is by converting your life insurance policy into an annuity. An annuity is a type of savings contract designed to make guaranteed regular payments that will last your entire life. Annuities turn your cash value into income, so you could receive a potentially higher payout from an annuity than if you kept your life insurance.
An annuity could also help make it easier to budget your savings — because the payments could be guaranteed to last your entire life. This guarantee could help ease your worry about running out of money in retirement.
If your priority is getting as much retirement income as possible, an annuity could be one solution. But one downside is that you would leave a smaller inheritance for your loved ones because you gave up your life insurance — and this decision could leave them with a financial burden when you pass away.
Expecting the Unexpected
If you don't need extra income now, you could keep your cash value as an emergency fund. The value will keep growing, as long as you pay the premium, so you could have even more money in the future. Retirement could present all kinds of unexpected expenses, such as the need to make significant home repairs, replace a car or help a family member. Having an emergency fund could help you manage these costs. However, keep in mind that the policy loan will still incur interest.
Health care expenses, in particular, catch many people off guard. According to the Department of Health and Human Services, it can cost over $80,000 per year to stay in a nursing home — and these costs are not covered by Medicare. By not touching your cash value, you could have an extra "emergency fund" for whatever comes your way.
Planning for Tomorrow
Remember, you don't have to spend your cash value. By not taking anything out, you could leave behind a larger inheritance for your loved ones. However, unless you make payments for an extended period or pay a significant amount, your cash value will likely be much less than the premium payment. If the death benefit doesn't have to pay off any outstanding loans, your beneficiaries will receive the full amount.
You could also set up your cash value to make your premium payments — so you could keep your life insurance coverage without paying anything out of your monthly retirement budget. If you ever need extra money, your cash value will be available. Otherwise, you could feel proud knowing you're preparing a gift for your loved ones.
Considering Cash Value
Before you take out cash value, consider how it will impact your long-term life insurance coverage. If you have a universal life policy, your insurance charge will increase as you get older. You may choose to build cash value to help pay these higher premiums later on. If you do take some of the value out, however, it could be helpful to make sure enough remains to cover future premiums during retirement. Otherwise, you'll need to pay more out of pocket — or your policy may lapse.
For whole life policy loans, you'll owe interest on the amount taken out. If you can't pay off the interest charges, your policy could lapse. Consult with a financial representative to make sure you can maintain your future coverage.
Permanent life insurance comes with many benefits and could help give you build a strong financial foundation. Considering your options and speaking with a financial representative could help you plan for a more certain tomorrow.