After decades of career building, consistent saving and careful planning, retirement is no longer a far-off destination in the distant future. A lifetime of hard work has come to a graceful close, and it's finally time to kick your feet up with your morning cup of coffee and ponder how you'd like to spend your day.
If only it were always so simple — even after years of preparation, sometimes retirement can go from being your hard-earned golden years to yet another financial stressor in the blink of an eye. The average retired American couple spends just shy of $300,000 in health care expenses alone throughout the course of their retirement. Thankfully, an abundance of resources (IRAs, 401ks, etc.) is available to help you prepare for these all-too-often unforeseen expenses — but did you know you can also utilize life insurance as a financial supplement to bolster your retirement income?
Here's a closer look at life insurance retirement plans and the benefits of investing in a cash value life insurance policy.
Among the numerous types of life insurance policies, investing in a permanent life insurance policy can yield a whole host of benefits throughout your retirement. This is because all permanent life insurance policies — in their various forms and subcategories — include a tax-deferred, investment-like savings component through which you can build your policy's cash value over time. (For this reason, permanent life insurance policies are also often referred to as cash value policies.)
How it works is relatively simple: When you pay your monthly premium on a permanent policy, a certain percentage of your payment is deposited into the savings component, thereby increasing your policy's cash value over time. Once the cash value reaches a certain amount, you can actually utilize it in the same way you would a personal bank account — you can withdraw funds, take out a loan against the cash value and even use it to gain tax exemption on your retirement income. Additionally, you don’t have to pay taxes on any withdrawals from your savings component after the age of 59½.
By utilizing this investment tactic — frequently referred to as a life insurance retirement plan, or LIRP — you can supplement your preexisting retirement funds. Bear in mind, however, that the key word here is supplement; cash value policies aren't designed to be your sole source of financial support during retirement but merely an adjunct to your current budget. Obviously, not every type of life insurance policy can be used as an LIRP; term life insurance policies, which lack savings components, don't have any cash value and can't be used to bolster your retirement funds. Only permanent policies include this feature.
Your next question may be, "What percentage of my premium payment is deposited into my policy's savings component?" The answer varies from policy to policy and provider to provider. Regardless of provider, however, one thing remains true of all cash value policies: The best thing you can do to rapidly increase your policy's cash value is pay more than your required premium every month, as any excess funds you pay go straight into your savings component.
Most providers recommend the “4% rule” to help you better outline your retirement budget: Once you reach 59½ years of age, take great care to withdraw no more than 4% of your policy's funds per year. In the event of an economic downturn or stock market crash, this strategy can continue to ensure your financial security.
For the most part, the average American has fewer financial obligations as they get older. Your mortgage is paid in full and the kids are grown and gone — you’re down to the simple, bare necessities. In fact, you may not even need life insurance at all by the time you retire. However, if your financial situation is a little more complicated, a cash value policy may be just the supplement your retirement budget needs. LIRPs are particularly advantageous for:
If you're entering your retirement years and looking into income supplements, a permanent life insurance policy is much safer and more reliable than some other forms of investment (such as stocks) and may be the perfect addendum to your budget. Additionally, joining an assisted living community can benefit your retirement by combining a myriad of living expenses such as meal costs and accommodation fees into one affordable monthly payment. At Grand Villa, our supportive staff is here to help you work out these more stressful aspects of retirement so you can get to the good parts.