Welcome to our article on how to use life insurance in your retirement planning. You might be surprised that life insurance can actually help you with your retirement. In fact, life insurance is a valuable asset that allows you to build equity over time and can even supplement your retirement income in a tax efficient manner. In this article, you will learn how you can use a life insurance policy as a retirement planning tool.
Can A Life Insurance Policy Be Used For Retirement?
Life insurance plays second to house and car insurance for most people but it is equally an important insurance policy to have. For those planning their retirement funds, it is easy to dismiss life insurance because it is viewed as a legacy for their loved ones. Retirement planning is viewed as a personal plan and not a legacy. The big question is Can A Life Insurance Policy Be used For retirement? The answer is YES. You can use your life insurance for a retirement fund inside through a Cash Value Policy. In Canada, there are two types of Cash Value Policies: Universal Life and Whole Life.
The cash value within your life insurance policy is the balance remaining after a portion of the premium payment is used as insurance costs. This makes life insurance useful in different ways in retirement. The cash value account of your life insurance policy grows over time and can be withdrawn as a source of income post-retirement. One advantage of cash value policies is that they allow for tax-deferred growth, which means that any money earned inside these life insurance policies is tax-free.
The most recommended type of life insurance that will benefit you in retirement is known as Term Life insurance. It is the least expensive type of life insurance in terms of out-of-pocket expenses and the amount of coverage you get for the money. This type of life insurance guarantees you a death benefit during a specified period. It could range between 10 to 30 years and when it expires, you can renew again for another term, convert to permanent coverage or terminate the policy.
The structure of a Term life insurance can be useful for a retirement savings plan. It can be useful in the following two ways:
It provides for your family - It provides you with basic financial protection as the breadwinner of the house. It ensures that your family is well taken care of when you are no longer with them. You would not have to worry if you have not accumulated enough savings for your family before your demise. A Term life insurance will cover your loved ones.
Low premiums – The low premium fee will give you the opportunity to free up more cash for other purposes like investment or even taking the cash out for retirement expenses. You can use the extra cash to save and invest for your retirement, pay for college or other financial goals that you may have.
The life insurance policy gives you the opportunity to provide for your loved ones and also provide for yourself post-retirement. You can contact a financial advisor to help put everything into perspective for you.
How To Use Life Insurance In Your Retirement Planning
One way of using your life insurance is to save some money for your retirement. Life insurance is a tax-efficient way to shelter some money. The recent tax law that was passed on passive income has increased tax obligations, especially for side businesses. But life insurance does not fall under this law. You can grow your income in the policy at a tax-deferred rate. The money saved on tax can be used in retirement.
Another way to use life insurance in your retirement planning applies to those that own businesses. If you own a corporation, it allows you to take money out of your corporation tax-free. To give this context, there is a type of account for businesses in Canada known as the Capital Dividend Account (CDA). This is a notional account in Canada’s accounting system that allows business owners to take money out of their corporation tax-free. The only two ways to be certified for a CDA are through Capital gains investments and Life insurance.
Three Ways To Access Cash From Life Insurance For Your Retirement Income
1. Direct withdrawal
If you have set up a life insurance policy with plans for your retirement embedded in it, one of the ways you can access cash for your retirement lifestyle is through direct withdrawal from your life insurance policy. The money in your cash value grows tax-deferred which makes it possible for you to accrue as many funds as possible. However, even though that money goes tax-free, withdrawal is not tax-free. You and your business/company will be taxed if you make a withdrawal from your policy.
2. Policy Loan
This is another way you can take out money from your life insurance for your retirement expenses. A policy loan is a way of taking a loan from your insurer. You do not need to provide any collateral as your policy will be used for that purpose. With this, you also do not have to go through financial underwriting. It is easy to obtain since you are getting it from your insurer. With your policy being the collateral, if you do not complete the repayment of the loan, the balance payment will be deducted from your death benefits. One disadvantage is that the loan is obtained at a higher interest rate.
3. A collateral loan from a private bank
Another option is using your life insurance policy to get a loan from a bank. This is a bit different from getting the loan directly from your insurer. You can use this method to lend money out of your life insurance policy for your retirement expenses. When you approach the bank to use the cash value of your policy as collateral for the loan, you have the opportunity to negotiate for a lower interest rate than when you take out the loan from your insurer. You also have to go through some financial underwriting with this method. One standout benefit of this method is that it works as a line of credit. This means that you only lend what you need to spend on your retirement needs rather than the whole thing and paying interest on the entire collateral loan.
