Recently I read a comment by an executive at ING stating that most people have their retirement “chosen” for them. Rather than having the flexibility to plan and control one’s life to the fullest, many people are being shown the exit by arbitrary age limits (66 or later for Social Security, for example), forced retirement (65 for commercial airline pilots), required minimum distributions from retirement accounts, or various forms of age discrimination.

What if you don’t want to stop at some age prescribed by some organization, the government, or society? A good number of people are missing a significant opportunity to provide for their own retirement, on their own terms by ignoring the tax favored benefits of cash value life insurance. While the primary reason for having life insurance is to provide a death benefit to survivors, permanent life insurance policies offer a significant array of what can only be described as “living” benefits! That’s right — benefits that a life insurance policy, crafted correctly, can provide to a person while they are still alive.

This series will look at several ways that the cash value of a permanent life policy can be used. First of all, let’s restate some key elements of life insurance::

  • There are two types of life insurance:: term and permanent.
  1. Term coverage provides a specified death benefit over a specific period of time, for a level premium;
  2. Permanent coverage is designed to last the insured’s entire life. Accumulation of cash is possible
  • The death benefit payout is generally free from taxes to the beneficiary (estate tax laws may include death benefit proceeds). The use of accumulated cash value is tax free to the policy owner if the policy is constructed properly to avoid classification as a modified endowment contract

Policies that accumulate cash value, such as universal life, can often be overfunded beyond the premium that is required to provide the basic policy features. Even relatively minor amounts of overfunding can provide significant returns over time.

The cash value of such a policy can be used to provide increased flexibility in planning for retirement by::

  • Provide a bridge for getting to the point when other retirement payments or Social Security begins;
  • Supplementing other payments in retirement, on a tax free basis;
  • Protecting survivors or favored beneficiaries in the event of premature death;
  • Hedging against an out of scale changes in the cost of living

In the next chapter, I’ll address the use of life insurance to support the launching of or insuring the sustainability of a business. Future chapters will deal with paying for a child’s or grandchild’s education, supporting other family members, and helping to cover the cost of illness or extended care.

 

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