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- Both whole life insurance and variable life insurance can potentially include tax advantages.
- Some life insurance policies offer long-term care clauses that can be used for retirement planning.
- In some cases, a life insurance loan can be an effective source of additional income in retirement.
One of my biggest financial goals for 2024 is to finally get life insurance. But as I was researching which policy would make the most sense for my family and my future goals, I wondered how else life insurance could improve my financial portfolio.
I’d heard that wealthy people use their policies to earn extra income or supplement their retirement savings. To make sure I got the right plan, I asked financial advisors how to get the most out of life insurance. Here’s what I learned.
1. Life insurance can deliver tax-free dividends
When shopping for life insurance, the first thing you need to decide is whether you want to buy whole life insurance or term life insurance. While both have their pros and cons, certified financial planner Hazel Secco says whole life insurance can offer tax-free dividends.
“Although dividends are not guaranteed, policies from established companies often offer around three percent tax-free dividends,” she says.
According to Secco, anyone who wants to build wealth to cash in during retirement can accumulate dividends over time and use them as a tax-free pool of money.
However, Secco says using life insurance as a savings option is a long-term strategy.
“Ideally, you should stick with this approach for at least 10 years, but preferably 15 to 20 years, to fully benefit from the compound interest effect of tax-free cash value growth,” she says.
2. Variable life insurance can also have a cash value component
Secco says variable life insurance policies can also offer a cash value component.
“If a variable life insurance policy produces high returns over the years, it can essentially create another tax-advantaged investment account,” she says. “But it’s especially beneficial to buy the policy up front because it gives the cash value more time to grow and benefit from compounding, especially when you’re younger.”
She explains that as you get older, insurance fees (such as funeral and administration fees) increase, which can reduce the effect of compound interest because these fees are automatically deducted from the total cash value.
3. Long-term care insurance can help with retirement planning
When choosing life insurance, Secco says life insurance companies offer products with long-term care clauses that can be part of a retirement plan.
“These supplemental insurance policies can either pay directly to a nursing home or care facility, or even provide income to family members who care for you,” she says. “This can be a creative way to supplement your income in retirement, especially in the later years when the need for long-term care becomes more common and additional income is needed.”
4. Life insurance loans can provide additional retirement income
Certified financial planner and CPA David Peters explained that you can take out a life insurance loan against the cash value of your life insurance policy.
“To increase your retirement income, you can take a loan against the cash value of your life insurance,” he says. “As long as it’s a loan, it’s tax-free.”
However, he points out that this will reduce the death benefits of your policy for your beneficiaries.
“Even though this is tax-free income, the catch is that it is a loan that will be deducted from your death benefit plus any interest that may have accrued when you actually die,” he explains.
