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When people buy life insurance, it’s mainly to leave money behind for a spouse, children, other relatives or close friends.Permanent life insurance can fund retirement

But an increasing number of middle-aged and senior Americans are looking at life insurance for the financial benefit it can provide during their golden years. Some savvy savers and investors are using permanent life insurance to help fund a more secure retirement.

Three varieties of permanent insurance — also known as cash value insurance — offer policyholders a chance to supplement their retirement income:

  • Whole lifeinsurance offers a guaranteed interest rate from the insurer, plus potential dividends that are based on three factors, such as the insurer’s actual claim’s experience, operational efficiency and investment performance. To receive dividends, the policy must be issued by a mutual life insurance company. Dividend interest crediting rates for whole life insurance policies usually are in the 4.5 percent to 6 percent range.

    Although, says Barry D. Flagg, the inventor and founder of Veralytic, the leading online publisher of life insurance pricing and performance research and product competitiveness ratings, “total dividends are typically greater due to the refund of over-charged cost of insurance charges and policy expenses.” They typically have minimal guarantees of 3 percent to 4 percent, which may be enhanced by dividends.

  • Universal life insurance also has a fixed-rate component, typically offering policyholders a minimal annual return in the 3 percent to 4 percent range. Returns can be negative after deductions for cost of insurance charges and expenses, Flagg says. Returns also can be slighter higher, but contractual guarantees on these policies typically establish a preset minimum return. Universal life gives you the advantage of flexibility: You can increase or decrease the death benefit, and vary your premium payments. See more in Insure.com’s life insurance basics.
  • Variable life insurance policies permit policy account values to be allocated among a family of mutual-fund-like accounts, so performance is based on equity and fixed income markets. So just as your 401k money can fluctuate as stocks or bond prices rise or fall, so too can investments within a variable life insurance policy. Over time, good-performing variable life policies may achieve annual returns in the 6 percent to 10 percent range, depending on your risk tolerance.

Here’s more information on cash value life insurance.

Adam Sherman, founding partner at 1847 Private Client Group, says the tax advantages of life insurance also make it an attractive option for those in retirement.

“Life insurance continues to be an attractive savings strategy for savvy investors due to favorable tax treatment during accumulation and distribution,” Sherman says.

Life insurance offers several tax-preferences useful for funding retirement, Veralytic’s Flagg adds. “For instance, cash values grow tax-free, and can be withdrawn and/or borrowed tax-free,” he says. “In addition, death benefits are also received tax-free, and can be used to repay with tax-free dollars any policy distributions taken via loan. In other words, the taxation of a life insurance policy is similar to the taxation of a Roth-IRA, which is commonly used to fund retirement.”

But, Flagg notes, the rules governing what you can be charged and what you’re permitted to invest in with a Roth IRA are dramatically different than a life insurance policy.

In addition, the rules governing what you’re required to be told about costs and performance are again dramatically different for a Roth IRA than a life insurance policy, Flagg says.

Your financial advisor should provide benchmarking of costs and performance, Flagg says, and Veralytic provides benchmarking reports and also offers a service to connect those interested with a Veralytic advisor.

Getting your money out

Getting money from your life insurance policy is fairly simple, Sherman says. You start by calling your insurer and finding out how much cash value is in your policy. You can usually borrow up to 90 percent of the “cash surrender value” of a permanent life insurance policy, and funds can be distributed in a lump sum or annually. Some insurance companies may allow you to borrow slightly more than 90 percent, so if you require more, ask your insurer about your policy’s specific guidelines.

Borrowing the full 100 percent of your cash surrender value usually is not allowed, because having no cash value can cause your policy to lapse.

Some permanent policies might take two to three years to fund before there’s any cash available at all in them for withdrawals or loans. It typically takes 15 or more years to accrue enough cash value in a policy to offer a meaningful retirement income stream. But once you’ve built up cash value, getting the money out is straightforward. There’s no approval process.

Loans from the cash value, however, must be repaid, along with interest to the insurance company.

Loan-repayment rates are tied to the investments an insurer would have made, had you left the cash value in a permanent life insurance policy, rather than taking out a loan. When variable life policies have lower loan rates, it suggests the insurer intended to invest the funds in money-market instruments or cash equivalent securities. Meanwhile, whole life policies requiring a higher loan rate mean the insurer planned to invest the money in more aggressive instruments, such as stocks.

A life insurance withdrawal does not have to be repaid, but it reduces the death benefit your heirs will receive by the amount withdrawn.

 

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