In our last article, we discussed the three primary sources of retirement income for most workers. We also introduced the concept of “earning power”, and how our incomes are our most valuable financial asset. Within the range of retirement income options, we also discussed some of the problems facing those who may expect to rely on Social Security benefits, which may lead to an unstable financial future for many retirees.
What is the solution to the financial shortfalls many people may face when retiring? Here, we will discuss life insurance, particularly a form of insurance called “cash value life insurance”. Let’s begin.
A Financial Solution for a Lifetime: Cash Value Life Insurance
Life insurance represents a great financial solution for those concerned with their ability to pay for expenses after retirement. While there are many different types of life insurance, one in particular stands out: Cash value life insurance.
What is cash value life insurance? It is a specific type of insurance policy that pays out upon the policy owner’s death while accumulating value during the policy owner’s lifetime. The interest and earnings on this type of insurance policy are not taxable, offering significant benefits. Cash value life insurance can be broken down into different categories, including:
- Whole life
- Variable life
- Universal life
Regardless of the category, all of these are considered permanent life insurance policies because they provide coverage for the duration of the policyholder’s lifetime.
What are the Benefits of Cash Value Life Insurance?
Of the retirement planning and savings products, cash value life insurance offers tremendous flexibility to the policyholder. It is the only such financial solution that offers benefits:
If the policyholder should die: if the policy owner dies unexpectedly, a death benefit is paid to the named beneficiaries as a replacement for lost earning power. Funds are available for family members of the deceased, allowing them to pay their expenses without worry.
If the policyholder should become disabled: unlike earned income, which can stop if the worker becomes disabled, a cash value life insurance policy continues to grow in value – even if that person is unable to make the premium payments. There is a mechanism in many of these policies called a “waiver of premium benefit”; this means that if the policyholder should become unable to work through sickness or injury, the policy’s benefits will continue to be paid as though premium payments never stopped.
If the policyholder reaches retirement age: lengthening lifespans and advanced medical care means that most of us will make it to retirement age. Cash value life insurance provides a twofold financial benefit: it provides a source of retirement income and it protects the policyholder and his or her family with financial security as long as the policy is in effect. It is important to understand that any withdrawals made of the value of the policy as well as any loans taken from the policy value will reduce death benefits and the overall cash value available to the policyholder.
Retirement Planning with Cash Value Life Insurance
For retirement planning purposes, few solutions offer the flexibility and accessibility that cash value life insurance policies have. This solution is a means of strengthening one’s financial future, eliminating worries about shortfalls in government retirement benefits and loss of value in investments and retirement accounts. Cash value life insurance plays a number of roles in the retirement planning picture, including:
Providing a source of income after retirement – the cash value accrued in the policy over the policyholder’s lifetime can be paid out in a lump sum by surrendering the policy, converted into a guaranteed lifetime income stream, or paid in periodic withdrawals by the policyholder. Policyholders may even take out a loan of the policy’s value. Again, withdrawals and loans reduce the overall cash value as well as reducing the payable death benefit.
Protection of retirement income – when you retire, you may opt to choose the maximum life annuity option from your employer-sponsored pension plan and use the death benefits from the cash value life insurance policy to replace any pension income your surviving spouse may receive, if you should die before your spouse. While you are still alive, you and your spouse will enjoy a larger pension income, knowing that expenses will be covered if you should die unexpectedly.
Offering accelerated death benefits – specific conditions allow the insurance policyholder to collect all or part of the policy’s death benefit prematurely. These conditions include if the policyholder should have a terminal illness, requires long-term medical care, or is diagnosed with a covered catastrophic illness (see policy language for details, or discuss options with your insurance provider).
The Features of a Cash Value Life Insurance Policy
Now that we know about cash value life insurance and its many benefits, it is useful to understand its primary features. These include:
- Tax-Deferred Growth – under current laws and insurance regulations, the annual growth (interest and earnings) in value of a cash value life insurance policy is not taxable.
- Incredible Flexibility – policyholders have a range of options to choose from, depending on policy specifics. Some policies allow the policyholder to increase or decrease premium payments to suit financial circumstances and may even allow a single large payment to cover all of the policy’s premium. This is especially beneficial for wealthy people who are nearing retirement age.
- Access to Cash Value – if you are under 59 ½ years of age, you may borrow or withdraw a portion of the policy’s cash value without a tax penalty.
- Ownership Protection – since you own the cash value life insurance policy, loss of income due to changes in your employment status or eligibility in pension plans and Social Security do not affect the benefits the insurance policy pays out.
Final Words on Cash Value Life Insurance
Planning for retirement means that one must anticipate financial needs for the future. Protecting your family’s financial security is critical, and there are many options available. None offer the flexibility that cash value life insurance policies provide, however. To see if this type of financial solution is right for you, speak with an insurance specialist for details on purchasing this valuable insurance policy.