Life Insurance Can Be Used to Fund Retirement
1. Whole life insurance: Insurers guarantee an interest rate and there is a potential for dividends based on the insurer’s business performance. Usually, returns for these policies range from 4.5% to 6%. The policy usually has minimal guarantees of 3% to 4%, and these can be enhanced by dividends.
2. Universal life insurance: After deductions for expenses, policyholders usually get a minimal annual return ranging from 3% to 4%. These policies are flexible because they allow you to increase or decrease the death benefit and vary your premium payments.
3. Variable life insurance: These policies are linked to equity and fixed-income markets. Annual returns could range from 6% to 8% if you have a good-performing policy.
Tax advantages combined with the typical zero-rate environment today make life insurance a desirable option for those in retirement. Life insurance policies grow tax-deferred, creditors cannot reach life insurance policies, and getting money from your life insurance policy is relatively easy. The President of an estate planning firm in Florida demonstrates how these policies can be used to fund retirement with an example: if you pay more money than you owe for premiums into a variable universal life policy, you can withdraw that money tax free within 15 years of the funding.
You cannot borrow all of your cash surrender value because that would cause your policy to lapse, and some policies can take several years to fund before you have withdrawal options. Once you have built up that cash value though, there is no approval process to withdraw money and the withdrawal is tax-free. Interest rates tend to be low when repaying loans from the policy as well.
See Lynette Khalfani-Cox, Using Life Insurance to Fund Your Retirement, Fox Business, Apr. 19, 2012.
Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.