The American government has increased the number of tools Americans can use to fund their retirement. Among them is life insurance.
Life insurance has a purpose. If an individual passes away suddenly, their policy covers several post-death expenses. During a time when the family is mourning, they don’t need to worry about the costs. They can plan the aftermath knowing that the policy covers the basic costs.
In 2021, individuals continue finding ways to invest cash. Since some life insurance policies build cash value, they become an investment tool.
We offer seven strategies to use life insurance for retirement.
1. Pick the Right Policy
Life insurance exists in two principal types, term and whole. The whole policy is also known as permanent.
Term insurance is available in level or decreasing terms. The level policy death benefit remains the same throughout whereas the decreasing death benefit drops annually.
Whole life insurance is available in traditional, universal, and variable.
For retirement planning, industry professionals recommend a simple term life policy. Individuals with a net worth of over $11 million, benefit from a permanent life insurance policy.
2. Build the Cash Value
As you pick your policy, ensure that you opt for a serviceable death benefit. The more value it accrues, the more cash you have at your disposal to invest.
In most cases, the IRS doesn’t tax the cash value of a life policy. It will tax the proceeds. While you’re alive, keep an eye on these numbers. Otherwise, the taxes owed can reduce the benefit your beneficiaries receive.
The best way to maximize a life policy for your post-work years is to continue increasing the death benefit. Several policies allow you to do so until the age of 60. Afterward the benefits levels.
Keep in mind that the cash value depends on the premium.
3. Borrow from Yourself
Once your policy accumulates enough cash, you can borrow from yourself. Some individuals use the loan to fund a home renovation, a child’s college education, or investment.
Borrowing against your policy skips the red tape. Plus, the interest rate is lower than those provided by banks, lenders, and credit card companies. You don’t go through the application process or the financial background check.
You set the loan terms including the length. Policyholders can borrow up to 90% of the policy’s cash value. If you fail to pay yourself back, you can lose the policy. So practice good personal finance habits.
4. Speak with Retirement Professionals
To ensure that you’re on the right track, it’s worth checking in on your retirement assets with a professional.
Pick someone who understands how to use a life insurance policy in retirement planning. They help you navigate the taxes and additional strategies to maximize the tool.
Life insurance retirement planning is something that’s catching on, especially among physicians. Physicians Thrive offers a helpful guide.
5. Add Long-Term Disability Insurance
Once you start retirement planning, you’ll see that it leads to estate planning. Estate planning benefits individuals with significant assets. It also benefits those who have spouses and children.
Coupling long-term disability insurance with life insurance builds an emergency fund. If you borrow against your life policy and can’t pay yourself back, the disability insurance becomes your fallback plan.
6. Invest the Policy
Using your life policy as a retirement tool requires investing the policy’s cash value. All investing carries risk. You can invest the policy’s cash value in the stock market and ride the fluctuations. Real estate is another option, which remains a solid hedge against inflation.
Mutual funds are a pool of shares. Professional investors favor them too.
The latest in investing is socially responsible and ESG (environmental, social, corporate). If you’re a novice investor, apps allow you to automate it. Remember that you can seek advice from finance professionals.
7. Turn it Into Retirement Income
The purpose of a life policy is to benefit your family when you pass away. However, it is a retirement planning tool too.
You can turn it into retirement income by drawing from it. The process is similar to a deposit retirement account.
Life insurance offers several benefits. Planning for life post-work is important for all Americans. The average lifespan stands at 78 years. If you retire at 62, that’s 16 years that require funding. Some individuals enter retirement early even though they didn’t pick it. They experience an illness, job loss, or disability that prevents them from returning.
It’s always best to plan before the unexpected occurs.