When people buy life insurance, it's mainly to leave money
behind for a spouse, children, other relatives or close
But an increasing number of middle-aged and senior Americans are
looking at life insurance for the financial benefit it can provide
during their golden years. Some savvy savers and investors are
to help fund a more secure retirement.
Three varieties of permanent insurance -- also known as cash
value insurance -- offer policyholders a chance to supplement their
offers a guaranteed interest rate from the insurer, plus
potential dividends that are based on numerous factors, such as
the insurer's business performance. To receive dividends, the
policy must be issued by a mutual life insurance company. Returns
whole life insurance
policies usually are in the 4.5 percent to 6 percent range. They
typically have minimal guarantees of 3 percent to 4 percent,
which may be enhanced by dividends.
Universal life insurance
has a fixed-rate component, typically offering policyholders a
minimal annual return, after deductions for expenses, in the 3
percent to 4 percent range. Returns can be slighter higher, but
contractual guarantees on these policies typically establish a
preset minimum return. Universal life gives you the advantage of
flexibility: You can increase or decrease the death benefit, and
vary your premium payments. See more in Insure.com's
life insurance basics
Variable life insurance
policies are linked to the equity and fixed income markets. So
just as your 401k money can fluctuate as stocks or bond prices
rise or fall, so too can investments within a variable life
insurance policy. Over time, good-performing variable life
policies may achieve annual returns in the 6 percent to 8 percent
range for customers.
Here's more explanation of
cash value life insurance
Permanent life insurance is gaining popularity as a retirement
funding option due to pure economics.
"In today's world of a zero-rate environment, many people are
saying, 'I'd be willing to accept a 3 percent to 5 percent return
on my money,'" says Adam Sherman, the CEO of Firstrust Financial
Resources, a wealth management firm in Philadelphia.
Sherman says the tax advantages of life insurance also make it
an attractive option for those in retirement.
"All the growth, or appreciation, that happens inside a life
insurance policy is protected from current taxes. So it grows
tax-deferred," Sherman says.
Jean Dorrell, president of Senior Financial Security Inc., a
retirement and estate planning firm based in Florida, agrees.
"If you own a variable universal life policy -- and that's what
I have -- they can be very good for retirement income tax free,"
says Dorrell. "If you overfund it," she adds, "in 15 years time you
can withdraw it tax-free, under IRS guidelines." Overfunding a
policy means you put extra money into it, in excess of the premiums
due. You can then use the excess cash value in your later
Plus, when you take money from the cash value account of a life
insurance policy, you don't have to sell the asset, as you do with
stocks. When you withdraw an amount no greater than your cost basis
(the amount you have paid in premiums) or borrow money from the
policy, you don't have to pay capital gains and ordinary income
taxes, as you would if you'd sold stocks or bonds to raise cash
Creditors can't get it
"There are very few assets you can own that are tax-free and
creditor-proof. Life insurance and annuities are among them,"
That's one reason you should never take money from life
insurance to pay off debts during retirement, Dorrell cautions.
"You don't ever want to touch it when you've been sued or have
judgments against you from, say, a credit card company or a
mortgage lender," she says. "In most cases, your life insurance is
100 percent protected from creditors. So if you pull cash value out
of there, you're going to subject that money to possible seizure by
Getting your money out
Getting money from your life insurance policy is fairly simple,
Sherman and Dorrell say. You start by calling your insurer and
finding out how much cash value is in your policy. You can usually
borrow up to 90 percent of the "cash surrender value" of a
permanent life insurance policy, and funds can be distributed in a
lump sum or annually. Some insurance companies may allow you to
borrow slightly more than 90 percent, so if you require more, ask
your insurer about your policy's specific guidelines.
Borrowing the full 100 percent of your cash surrender value
usually is not allowed, because having no cash value can cause your
policy to lapse.
Some permanent policies might take two to three years to fund
before there's any cash available at all in them for withdrawals or
loans. It typically takes 15 or more years to accrue enough cash
value in a policy to offer a meaningful retirement income stream.
But once you've built up cash value, getting the money out is
straightforward. There's no approval process nor are there any
taxes on what you withdraw. One caveat is "if you're depleting your
cash value and it's not considered a loan, that is going to be a
taxable event," Dorrell says.
Loans from the cash value must be repaid, along with interest to
the insurance company. With universal or variable life insurance
policies, loan rates generally average about 1 percent, Sherman
says. For whole life insurance, rates are higher -- usually in the
5 to 6 percent range, and older policies might even be higher --
due to how those policies were set up contractually.
Loan-repayment rates are tied to the investments an insurer
would have made, had you left the cash value in a permanent life
insurance policy, rather than taking out a loan. When variable life
policies have lower loan rates, it suggests the insurer intended to
invest the funds in money-market instruments or cash equivalent
securities. Meanwhile, whole life policies requiring a higher loan
rate mean the insurer planned to invest the money in more
aggressive instruments, such as stocks.
A life insurance withdrawal does not have to be repaid, but it
reduces the death benefit your heirs will receive by the amount