Generate Retirement Income With Your Life Insurance

The retirement years begin another phase of life. There are many pros to this next phase—it is more relaxing and less stressful with no schedules, no more bosses, you can wear whatever you would like, and endless opportunities to do things you couldn't do during the working years.

Unfortunately, it can also be a time of great stress where you may run into money troubles, and social security just does not cut it. Events may begin to occur in your life where you need to generate income during these years. 

Fortunately, if you have a life insurance policy, you can generate income from it. Please continue to read on as we explain how this is possible.

Contents:

●      Planning For Retirement

●      Return On Your Investments (ROI)

●      Annual Withdrawal Rule

●      Accessing Your Life Insurance Cash Value

●      Life Settlement as a Solution

●      Final Thoughts

Planning For Retirement

Planning for retirement is a crucial piece of your financial planning. Along the way, you may have built an investment portfolio filled with stocks and mutual funds in an IRA or a 401K through your company. It may have also been in your plan to rely on a pension once you retired. Then there is the monthly Social Security. All of these combined contribute to a substantial portion of your retirement income. Even with all the best planning, these sources of income still may not be enough to cover monthly costs in retirement.

Due to medical debt being the leading cause of bankruptcy in America, it is critical to plan unexpected expenses into your budget during retirement. Will you have the funds to pay for medical care if your health insurance denies a procedure?

Using your life insurance may be able to help close the financial gaps. Later in this article, we will explain how.

Return on Your Investments (ROI)

Having an investment portfolio as part of your plan can give you the greatest return. However, it can also produce the most significant loss. Bonds will return your investment at a more stable rate than stocks, but they will fall when interest rates rise. All of which leads to a reduction in your portfolio.

Well-diversified portfolios that do not rely on stocks and mutual funds alone can also sustain a significant loss when markets are trending down. When this happens, your retirement becomes less secure.

You will always want to choose investment options that coincide with the level of risk you can take at your phase in life. You will also want to choose ones that have shown they can stand the test of time.

Annual Withdrawal Rule

For years, financial advisors counseled their clients to withdraw only 4% annually of their total IRA and retirement savings. For example, if you were to have $500,000 in savings, the recommended annual withdrawal would equal $20,000. The idea behind this advisement was you would make that money last for at least 30 years.

Now, with changed interest rates comes modified advice. Some financial advisers say that 4% annually is too large in our current low-interest-rate landscape. For the average retiree, the recommended rate is currently 2.75% - 3%.

This recommendation may leave you searching for additional sources of income to make ends meet. Frequently, retirees are left with the option to go back to work or downscale their standards of living. Sometimes they even have to do both. 

Sadly, most Americans do not have enough saved up to survive on 3% annually. Do you have enough? It has been reported that the estimated median savings for sixty-somethings is $644,000. With the new recommendation, that equates to $19,320 annually — putting your income very near the poverty line.

Even when factoring in Social Security (which on average brings in an additional $1413 a month), you now make $36,276 per year. For some with low-cost lifestyles, this may seem sufficient. However, when you factor in the average healthcare costs being extremely high during retirement, it becomes significantly less.

Accessing Your Life Insurance Cash Value

Your permanent life insurance policy is a potential source of additional income if it has accumulated a substantial amount of cash value.

You will have several ways to access this cash from your policy. The one you choose is dependent upon your specific situation. As with any major decision, it is recommended to discuss this with a trusted advisor. 

The three ways you can access the cash value of your policy are:

#1 Canceling Your Policy

Some retirees get to a point where they no longer want or need the death benefit coverage from their life insurance policy. Then, some may not be able to afford the premiums anymore. Either way, if you no longer want or need this benefit, you could cancel it and receive the cash value.

Once canceled, your insurance company sends you a check in the amount of the remaining cash value on your policy, less any surrender charges and applicable fees.

Please note that if the cash value you receive is greater than the total payout of premiums to your policy, you will be required to pay an income tax on the difference at your top marginal tax rate.

At the very least, you will gain "income" by no longer having to pay the premium payments. This also means that the beneficiaries will no longer receive the death benefit they would have otherwise received.

#2 Withdraw Funds

If you are not quite ready to cancel your policy, you have the option to withdraw funds directly from the accumulated cash value in the policy. 

The important pieces to note here are the death benefit will be reduced by the amount you withdraw, and you will still need to pay your monthly policy premiums. As with the cancellation, if you withdraw more than you have paid out in premium, the difference is taxed as ordinary income.

#3 Policy Loans

This last option is the one many policyholders prefer. You can take out a loan against your life insurance policy using the cash value as collateral. It is preferred because there are no underwriting requirements involved for this type of loan. It is simply you borrowing money from you. Your interest rate will be predetermined. The caution with this is if you choose an amount too great, the policy itself can lapse.

There are many cases where the loan will not have to be repaid. The policy's face value, however, will be reduced by the outstanding unpaid loan amounts.

With policy loans and policy fund withdrawals, you can do this as many times as needed without taking all the cash value at once.

Utilizing life insurance as a means of supplemental income during the retirement years is preferred by many. Drawing from your policy's cash value can be a great resource if you are looking to boost your monthly income. You can achieve this if you have a whole life, universal life, or variable universal life insurance policy.

Please note that if your insurance policy is term life, you will not be able to utilize it in this manner as it carries no cash value.

Life Settlement as a Solution

Under ordinary circumstances, utilizing the cash value accumulated in your life insurance policy works out well. But what if you receive a diagnosis not covered by Medicare or supplemental health insurance? The denial places you in a position to possibly need more money than you have in your policy's cash value and fast. 

There is an alternate solution to canceling your policy, withdrawing funds from your policy, or taking out a loan using your policy. It is called a life settlement.

A life settlement is an option to sell your life insurance policy to a third party, referred to as the investor. The cash earnings from the policy's sale will be paid directly to you as the policyholder or beneficiaries of the policy.

The investor becomes the new beneficiary and will receive the death benefit upon the policyholder's passing. As the policyholder and seller, you will receive an immediate sum of money for cashing out before death. The payout value will be more than the policy's cash surrender value but less than the death benefit. Multiple factors, including your age, life expectancy, and policy details, determine the exact payout. However, there are cases where the payout is two to three times the cash value amount in the policy and received in little as a week.

If your circumstances extend to a terminal illness, then a viatical settlement may be the best option. This is similar to a life settlement, where a buyer, the Viator, buys your life insurance policy, becoming the new beneficiary. Again, you can receive a sizable amount of money upfront and remain insured on the policy.

A viatical settlement usually has a larger payout than a life settlement. However, the policyholder must have a short life expectancy.

Final Thoughts

An insurance policy can serve many purposes in a lifetime. It can end up being an additional source of monthly and lump-sum income when you retire in the retirement years. Please consult your trusted financial advisor or life insurance agent for details on the best path to take for your circumstances to access the cash value in your life insurance policy.