Many of us realize how important it is to save for retirement, but daily living expenses seem to leave no room to save up for this purpose. What many people don’t realize is that you can buy a type of life insurance that can actually help you save up for retirement, while also protecting your family in the event of your death. Cash value life insurance can eliminate the uncertainty of planning for your retirement by functioning as a long-term savings plan that grows tax-deferred until you reach retirement age.
What is Cash Value Life Insurance and How Does it Work?
Cash value insurance is a type of universal or whole life insurance that lasts for the duration of your life, as long as you continue to pay premiums. With a cash value life insurance plan, a portion of your monthly premium is transferred to a savings account within the policy itself, and those savings grow tax-deferred over the policy’s lifetime.
Who Is a Good Candidate for Cash Value Insurance?
A cash value universal life policy is a safe and smart investment in your future as well as your family’s future well being. For example, if your IRA and 401(k) accounts have reached their caps, you could purchase a cash value life insurance policy to provide an additional tool to help you save for retirement without having to pay taxes on your savings.
Additionally, if you plan to leave your family an inheritance, the benefit of a tax-deferred savings account attached to your cash value policy may prove to be a great option. A cash value option on your whole life insurance policy may also be a useful way to ensure lifelong support for your beneficiaries, as in the case of families with special needs children who will need support throughout their lifetimes. Adding a cash value option to your universal life insurance policy also provides an efficient and smart way to save up for any unforeseen expenses that may come up in the future.
As with any form of life insurance, your beneficiaries will receive a payout upon your death as long as the premiums on your policy are current. Even if you borrow money from the policy’s cash value during your lifetime, the policy will still provide a payout for your beneficiaries upon your death, since this cash value exists in addition to the policy’s payout amount. Bear in mind, however, that if you withdraw money from the savings account prior to your death, this will reduce the total amount of death benefit that will be paid out to your beneficiaries when you die.
Another great feature of cash value life insurance is that your options for using your cash value amount expand as your policy matures. The more funds you have in your cash value savings, the more you can do with it.
Withdrawing Money from Your Cash Out Life Insurance Policy
You may use the funds accumulated in your cash value policy in several ways, and you have several options for cashing out funds from the policy; however, there may be consequences to using a portion or all of your cash value amount, so it’s important that you understand all your options, as well as their pros and cons, before pulling cash out of your account.
Typically, most policies will allow you to make partial withdrawals from the cash value savings account of your policy once that amount has grown for over a year. Also, remember that withdrawing money from the savings portion of your universal life insurance policy will reduce the amount of death benefit that your loved ones will receive in the event of your death. The terms of your specific policy will determine the amount you can take out of the cash value savings, as well as the time frame during which you can withdraw the funds.
Another option is to borrow money from your accumulated cash value at a lower interest rate than what you’d pay on a traditional bank loan. This could help you secure funds for such needs as a down payment, or to cover a portion of your children’s college expenses. Cash value insurance is ideal for people who want to avoid paying high interest rates on a loan.
When you take out a loan against your cash value amount, you’re borrowing money using the life insurance policy as collateral. This is not the same as withdrawing money from your policy, as you will have the option to pay back the funds into the policy so that your beneficiaries can receive the full policy payout amount upon your death. If you pass away before you’ve completed repaying the loan, the outstanding balance would be deducted from your policy’s death benefit.
Use Your Cash Value to Pay Your Policy Premiums
Once your cash value amount has grown for at least a year, your policy may allow you to borrow cash from that amount to pay your policy premiums, ensuring that your premiums will be paid regularly and on time, and that your policy will remain in force, in the event that your income is unexpectedly reduced and you can’t pay premiums out of pocket. The risk with this option is that if you use up all the funds in the cash value account, your policy will lapse, and you will lose your life insurance coverage. Nevertheless, this option may be a lifesaver for individuals who need temporary financial relief during a period of financial struggle due to illness or loss of employment, as you will not incur fees nor will you have to pay taxes on funds withdrawn if you use those to pay for insurance premiums.
Surrender the policy
If for any reason you no longer require life insurance, you may surrender your policy and receive a lump sum of money that will be equivalent to the cash surrender value of the policy. Depending on how long your policy was in force at the time that you surrender it, you may incur surrender fees when canceling it, and these fees may be applicable for as long as ten years or more into your policy. This is typically the least recommendable option, as any money you receive upon surrendering your life insurance policy will be also be taxable.
Using Your Cash Value Savings for Retirement
Using your policy’s cash value to save for retirement has several advantages as you will have many options once your cash value savings has grown over several years. Because the cash value option is only available with whole and universal life insurance, your life insurance coverage lasts for the entire remainder of your life, growing yearly while protecting your loved ones with life insurance, and providing the peace of mind you need to enjoy your retirement.
Among your options, you may choose to use your cash value funds to pay premiums, which can ensure coverage for you and your family once you retire and are no longer earning income. Upon retirement, you’ll also have the option to withdraw funds from your cash value instead of from your IRA or 401K accounts, providing an additional source of cash support that can help maintain your standard of living during retirement.
If you’d like to learn more about adding cash value life insurance to your retirement plan, or to request a quote for universal or whole life insurance with a cash value option, contact Symmetry Financial Group and speak to one of our knowledgeable and friendly agents today. They will be happy to help you find the right policy to help you save up to meet your retirement goals, while also protecting your loved ones.