How life insurance can evolve into retirement income
The decision to purchase life insurance is often a simple one when you have loved ones who depend on your income. After all, it's important to ensure that your family has what it needs financially after you die.
But while life insurance may seem like something you buy primarily for the protection of others, that's not the only reason to purchase coverage. For example, your life insurance could also benefit you while you're alive. And, in some cases, your life insurance policy could even evolve into a source of retirement income.
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How life insurance can evolve into retirement income
Here are a few ways your life insurance could benefit you as a source of retirement income:
The right life insurance policy can build cash value
"First and foremost is death protection, but in some policies, it gains cash value," says Devin Graham, a WoodmanLife insurance agent.
That's true for index universal life (IULs), for example. The cash value growth of IULs is based on the market, and IULs "can give the member the option of gaining up to 8% interest," Graham says.
And, there are other cash value options, like whole life or permanent life insurance policies, as well. Whole life insurance policies typically aren't tied to the stock market. Rather, these policies grow at a fixed rate set by your insurance company.
If you need income in retirement, you may be able to withdraw money against your life insurance policy's cash value. You may also have the option to surrender your policy and receive the entire cash value. That cash value includes the money you've paid into the policy, plus interest, not including any associated fees.
Purchase a life insurance policy now to start building cash value.
Your premiums could be returned to you
Term life insurance is commonly thought of as a use-it-or-lose-it policy, but that isn't necessarily the case. For example, you may be able to add a return of premium rider to your policy. That way, if you outlive your policy's term, you can receive a refund for some or all of the premiums you paid while your policy was active.
Let's say you purchase a 20-year term life insurance policy while in your 40s. That policy has $300 monthly premiums and includes a return of premium rider. If you haven't used the death benefits tied to your term life policy by the end of the 20 years, you could get a refund of $72,000 (240 premium payments at $300 per month).
You may be able to sell your policy
You also may be able to sell your life insurance policy to life settlement companies. By doing this, you'll receive a one-time cash payment for the sale of your policy.
However, if you take this route, it's important to compare your options. Offers vary from one company to another.
And, because these companies are typically most interested in buying high-value life insurance policies from older policyholders, "you'll probably need to have at least a $100,000 life insurance policy and be over the age of 65 to sell your policy," according to the Texas Department of Insurance.
The bottom line
Life insurance can be an effective way to financially protect your loved ones after you die, but it may also allow you to supplement your income in retirement. If you choose to take this route, it may benefit you to look for whole life insurance or index universal life insurance to ensure that your policy can adequately supplement your income. If you choose a term life insurance policy, consider one with a return of premium rider so you get your money back if you outlive your policy's term.
Aside from offering a supplemental source of retirement income, life insurance can also help cover the high cost of long-term care. For example, if you add a long-term care rider to your policy, you may be able to use a portion of your death benefit to cover additional healthcare costs if you develop a debilitating condition, which can cut down on your expenses during retirement.
