5 Ways to Use Life Insurance in Retirement

Article overview

This article explains how some life insurance policies can offer living benefits and features (often added through riders) that may let you access funds while you’re still alive. Key highlights include:

• Life insurance types:  A term life policy covers a set period; permanent life can last a lifetime and may build cash value.
• Living benefits: Insurance riders may allow early access to benefits in situations like long-term care needs or a terminal illness diagnosis.
• Retirement planning uses: Certain permanent policies may be used for withdrawals, loans or other planning strategies; with certain tradeoffs to consider.
• Important considerations: Using living benefits can reduce your death benefit, and riders may add cost or limitations.

Whether you already have life insurance or are just starting to explore the ways it can protect your family and loved ones, it’s likely that your motivation for getting coverage is the death benefit of the policy. But did you know that there are ways life insurance can help you financially while you’re still alive?

These features—called living benefits—are additions to your policy that allow you to access some or all of the death benefit funds before you pass away. Understanding how they work can help you use them to their full potential.

Different kinds of life insurance for different situations

Before diving into the ways life insurance can benefit a policyholder directly, let’s identify the two basic types of coverage: Term life insurance and permanent life insurance.

A term life policy is one that lasts for a specific period of time (usually between 10 and 30 years), whereas permanent insurance can provide lifelong coverage (as long as your premiums are paid on time).

Permanent life insurance can be either whole or universal. The two are different in their flexibility and guarantees, but both types of permanent life insurance build cash value as they mature, making them useful assets when you’re planning your future.

And riders that provide living benefits can be added to both term and permanent life insurance policies. (Although term life insurance does not build cash value, it can have a Return of Premium rider: If you’re still alive at the end of the term, all your premium payments are returned to you.) For more details about how term and permanent life insurance compare, go here or watch this short video.

5 ways to use your life insurance in retirement (or earlier)

1. To pay for your long-term care. When traditional health insurance does not fully cover the cost of your long-term care, a Long-Term Care rider added to your permanent life insurance policy can help. The rider lets you convert part of the policy’s accrued value into either a lump sum or a monthly payment that’s used to cover the cost of your care at your home, a community organization or other facility.

2. As a financial supplement. There are several ways to access the cash value that’s built up over time in a permanent life policy. You can cash out (surrender) the policy for its dollar value; you can keep the policy and make withdrawals (reducing the policy’s value); or you can borrow money from the policy that can be paid back later.

3. As collateral on a loan. Because life insurance is considered a financial asset, it can be used as collateral on a loan.

4. To support you if you’re terminally ill. An Accelerated Death Benefit rider allows a policyholder diagnosed with a terminal illness to access money early. Use it to pay for nursing home care, hospice or other expenses you incur from a terminal or serious illness.

5. As an estate or legacy planning tool. Life insurance can help you transfer wealth to children, charities and other heirs in a way that’s most tax-efficient, helping with things like estate taxes and even special situations like providing lifelong care to an heir with disabilities.

Are there drawbacks to adding living benefits to a life insurance policy?

Here are some of the most common disadvantages associated with living benefits riders:

• Your policy may not grow cash value as fast as one without riders.
• Accessing money from your policy may reduce the amount that is available as a death benefit.
• There may be conditions or limitations to when and how much money you can take from your policy.· 

What about an annuity?

Another way to financially supplement your retirement is through an annuity. There are different ways to set up an annuity: It can provide a fixed amount of money over a certain period; you can withdraw funds when you decide; or you can withdraw all of the money, plus earnings, at once.

You may want to talk to your life insurance agent to see how you can combine annuities and life insurance as you prepare for retirement. Together they can support you financially in your retirement years as well as providing a death benefit to your loved ones when you pass.

The best way to get the protection you need from a life insurance policy is to do some retirement financial planning with a trusted agent. Let them know how you hope to use the benefits and review the options together to make an informed decision about what makes the most sense for your situation.