Should I Keep Emergency Funds During Retirement
Regardless of your age, you should keep an emergency fund for unexpected financial needs. If you’re concerned that an unexpected cost during retirement could leave your family vulnerable to financial hardship, permanent life insurance policies might provide you with peace of mind. If the need arises, a permanent policy can allow you to take out a loan against the policy’s cash value. You can then pay back that amount, or it will be subtracted from your death benefit.
Is Whole Life Insurance A Good Investment For Retirement
A LIRP isnât worth it for most people, but thereâs no one-size-fits-all approach to saving for retirement. The high cost of permanent policies â nearly half of which are surrendered within 10 years for that very reason â and the lower rates of return outweigh the benefits of having an additional retirement account for most people.
If you contribute the maximum amount to your retirement each year and donât want to put additional funds into a traditional post-tax investment account, then a LIRP might be worth exploring. The best alternative to a LIRP is buying a term life policy and maintaining a 401 or Roth IRA. Even if you regularly max out your retirement accounts, a standard post-tax investment account can deliver a higher return on your contributions. And when you no longer need life insurance coverage, itâs simpler todrop term coverage than it is to cancel a permanent policy.
Five: Pay Less In Taxes
Taxes are a fact of life. Many of us dont want to pay any more in taxes than we absolutely have to. Life insurance offers tax benefits. Both term and permanent policies will provide your beneficiaries with a typically tax-free death benefit when you die, per IRC §101.
While youre living, you can take income tax-free loans from the cash value of your permanent policy.1
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Would It Help Your Estate
Some people with considerable assets can use life insurance strategicallyfor instance, as a way to take care of estate taxes. It could pay off business debt, fund any buy-sell agreements related to your business or estate, or even fund retirement plans.
As you can imagine, how you use life insurance as a tax-efficient part of your estate plan is very complicated. Youll need the help of an attorney who specializes in estate planning. Keep in mind that unless you have an estate that reaches into the millions of dollars in net worth, estate tax considerations probably dont apply. You, therefore, may not need life insurance for this purpose, but to be sure, its a good idea to ask a qualified expert.
Will I Need A Source Of Emergency Funds
It’s tough to know what unexpected financial needs might pop up during your retirement years. Most types of permanent life insurance policies include the cash value feature, which may be used as a source of emergency savings that you can access while you’re still alive.
You may be able to take out a loan from the cash value in your policy¹. If, for instance, you face a medical crisis that your health insurance doesn’t fully cover, you could borrow from your cash value to help pay your expenses. Having a source of emergency funds may be helpful when you’re on a fixed income. Wondering which type of life insurance policy could help you meet your specific financial goals once you retire? Your life insurance provider can help you decide.
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Tax Benefits Of Using Life Insurance To Pay For Retirement
There are many benefits of using life insurance to help pay for retirement, like being able to tap into the cash value of your life insurance whenever you wish. And even if you dont use the cash value, you can also use the cash value to pay for your policys premiums and free up a large monthly payment in your budget.
Cash value from life insurance can be withdrawn on a tax-free basis, which has a few advantages. Your cash value is tax-deductible, but it can also put you in a lower tax bracket if youre using the cash value to reduce how much youre pulling from your IRA.
But while its not considered taxable income, the cash value from life insurance isnt a perfect solution to avoiding taxes and fees. Cash value growth is based on the amount of money that you contribute to it, which is built into your premiums. The price you pay for your premiums also includes fees and commissions.
Speak with an accountant or financial advisor about the tax implications of your policy and its cash value. While pulling out cash value is almost always tax-free, there are certain instances that you may owe some tax on it, such as when you surrender the policy.
What to watch out for
Selecting A Coverage Length
If you decide to purchase a term life insurance plan, you’ll be given term length options, usually between 10 and 30 years, depending on your eligibility. The maximum term period you’re eligible for typically decreases as you age. So, if you’re in your 20s or 30s and planning for retirement, it can make sense to opt for the longest term you qualify for that way it’s in effect for as long as possible while you’re still providing an income for your family.
However, if you’re buying life insurance during retirement because you want to cover, say, the remaining balance on a 15-year mortgage you got five years ago, 10 years of coverage would make more sense. Learn more about how long your life insurance should last.
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Building Cash Value With Whole Life
Unlike term life insurance, which covers only a set number of years, whole life insurance is meant to be for life. When you die, your beneficiary will receive a set amount of money, which was determined when you bought the policy and the premium was calculated.
Though its also called permanent life insurance, whole life is in force only as long as you make the required payments, of course. If you skip a payment and dont make it up during the grace period, your policy will be terminated. If you want to continue to be covered, youll have to buy a new contract, at which point, youll be older and your premium will likely be higher.
Because whole life insurance will definitely pay a death benefit someday, it is significantly more expensive than term life insurance, which may expire before the policyholder dies. But the trade-off is that part of your payments goes toward the policys cash value. This cash value belongs to you. Depending on the policy, you may also earn interest or dividends on a tax-deferred basis.
The cash value of your policy is one reserve you can count on in retirement. So if you need a lump sum unexpectedly, you can either withdraw it or borrow it from your life insurance account. Generally, you can borrow against the policy up to the amount of cash value without owing tax. If youre receiving dividends, you wont owe tax on them until they exceed the total amount of premiums youve paid.
Pick A Permanent Policy To Get A Cash Value Component
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Feasibility Of Life Insurance As A Retirement Plan
You probably have or will have a life insurance policy anyway, so one that doubles as a retirement plan might seem too good to be true. In a way, it might be. Almost no one can rely solely on life insurance for retirement youll still need other savings such as an individual retirement account or 401.
Additionally, investing in a LIRP might not be worth it if youre below a certain income level. Because using life insurance as a retirement plan offers the same tax advantages as an IRA or 401, the fact that life insurance lacks a maximum yearly investment is the main draw.
A Roth IRA limits you to contributions of $6,000 dollars a year$7,000 if youre over the age of 50 . A 401 limits you to $19,500 dollars a year. Assuming you have a 401, that means you can invest $1,625 dollars a month in it.
The median household income of an American family is $5,264 dollars a month. Even without counting highly variable childcare expenses and student loan or credit card debt repayment, $4,140 dollars of that income is spent immediately. The average American family is left with $1,124 dollars to save for the future, use if theres an emergency, or put toward retirement.
Pick The Right Policy Beneficiary
Gray says a common and potentially very costly mistake is to make a lender a beneficiary of a life insurance policy, rather than an assignee. With a collateral assignment, the lender gets first dibs at the death benefit money up to the amount of the outstanding debt, then any remaining funds are parceled out to beneficiaries. If the lender is the beneficiary, though, that would entitle them to the entire death benefit which could leave the policyholders heirs with nothing.
Its a thing people need to be cautious about because its a commonly misunderstood situation, Gray says.
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In The Event Of Your Death
If you die while you are an active member, your beneficiary or family member should contact your employer. The employer will assist in coordinating any benefits that may be due. If you die while you are retired, your beneficiary or survivor should call Securian Financial toll-free at . VRS has contracted with Securian Financial as the insurer for the Group Life Insurance Program. For more information, see Losing a Loved One: Guide for Families.
Can Life Insurance Be Used As A Retirement Plan
The idea of using life insurance as a retirement plan may seem, at best, counterintuitive. At worst, it sounds vaguely fraudulent if youre not familiar with the intricacies of the life insurance industry. As far as most people are concerned, life insurance is there to support your family after you pass away, not to help you after you retire.
What if youre the beneficiary of someone elses policy? Could you use the death benefit you receive for retirement then? Hypothetically, yes.
However, theres no way of knowing when someone will pass away. You shouldnt be counting on their death to support you through retirement. You need something stable and more reliable.
Life insurance might still be the solution to your problems, but its going to depend a lot on your circumstances. Read on to discover if using a life insurance retirement plan is right for you.
Should You Use Life Insurance To Fund Your Retirement
Life insurance was not designed to fund retirement. If your financial advisor or a life insurance salesperson has ever presented this as an option, you should proceed with caution. While an array of permanent and whole life insurance policies make it possible to withdraw cash to fund part of your retirement, there are risks involved as well as huge fees to consider.
The financial professional you’re working with may not present it that way. A lot of times a salesperson will argue permanent or whole life insurance is the best way to save for retirement and avoid part of your tax bill. He or she will say whole life builds cash value you can withdraw or borrow against and tout the obvious death benefit that goes along with it. What he won’t tell you is how big the commission is, and how much more you might have for retirement if you bought term life insurance and invested heavily instead.
Further, many whole life insurance policies come with a surrender charge. Let’s say you fund your policy for years only to determine it’s too expensive and you no longer want to keep it up. If you want to get your hands on the cash value of your policy, you’ll need to pay a fee for that. Plus, there are tax consequences for withdrawing your earnings.
Jeff Rose is a certified financial planner, U.S. combat veteran and the founder of GoodFinancialCents.com.
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Do You Need Life Insurance For Retirement
Getting life insurance for retirement isn’t mandatory, but it can help your loved ones when you pass away in your retirement years. A life insurance payout can help pay for your final expenses, outstanding debt, or the loss of any income you were still providing. Furthermore, you might have a term life policy or an employer-provided life insurance policy that expires around the time you retire. If that’s the case and you still want to provide a death benefit for your loved ones, a separate life insurance policy for retirement makes sense.
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How Much Life Insurance Can I Afford
Permanent life insurance is generally more expensive than term insurance. That’s because it has a cash value component and because it stays with you as long as you live, as long as your premiums are paid.
Some term life insurance policies and whole life insurance policies offer fixed premiums and death benefits. If you’re on a fixed retirement income, that may help prevent you from shouldering unexpected increases.
Life Insurance Retirement Plans Vs 401s & Iras
Regardless of which kind of life insurance policy you decide to buy, dedicated retirement accounts such as a 401 or an IRA should still be the primary way you fund your retirement. Cash value life insurance has limited investment options and relatively low rates of return compared to dedicated retirement investment options.
A401 is a retirement savings plan that employers offer to employees. Many employers also match a certain percentage of employeesâ contributions to their 401s.
AnIRA is a retirement savings plan that you open and fund on your own. IRAs can be used alone or in addition to an employer-sponsored 401.
What Are The Benefits Of Whole Life Insurance And Using It To Supplement Retirement
Whole life insurance is a life insurance policy that also builds up cash value with tax benefits.3 A portion of each premium is set aside and invested in the policy’s cash value, which can be an alternative to saving.
Consider Maxing Out Other Vehicles First
This doesnt mean that no one should consider funding their retirement through life insurance. Vistica suggests that if youre already maxing out other retirement vehicles such as 401s and IRAs and have a life insurance need, you might be a good fit.
But Im not a big fan of using life insurance to help fund retirement, he says. Life insurance should first be viewed as a way to protect your family or business if something were to happen to you.
If youre older and have a high net worth, youll reap the most tax savings from life insurance withdrawals, although as Buerger notes, Tax savings are still tax savings.
If you dont need life insurance yet and havent reached your peak earnings, youll get a better deal with a Roth IRA. And if youre not contributing the maximum to your 401 and IRA, consider working these into your budget before branching into life insurance.
About the author:Alice Holbrook joined NerdWallet in 2013 and is an editor on the home/mortgages team. Her work has been featured by USA Today, MarketWatch, Newsweek and The Washington Post.Read more
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How Life Insurance Fits In
Prior to retirement, most families use most or all of their household income to support their lifestyle. If two people work, both incomes are generally essential to maintaining the familys standard of living. If just one person works, the same holds true. If one of those income earners were to pass away, the household could find itself in a financial emergency at one of the worst possible times.
The function of life insurance is to protect family members from the loss of income if you or another primary wage earner were to pass away.
Like any insurance product, there are multiple types of life insurance. Term life insurance offers coverage for a set period of timenormally 10 to 30 years. Permanent life, also called cash-value, is a lifetime policy thats often used in estate planning. It comes in two flavorswhole life and universal life. Here are some questions that may help you decide what you need.