When entering retirement, re-evaluate your life insurance. Perhaps you're still paying premiums on a whole life policy. Without dependents relying on your financial support, you can use it for various estate-planning needs or for leaving a legacy to charity or your children. But what options might you take with your policy while you're still living?
The general retirement advice for life insurance is that you no longer need coverage as most people buy coverage to protect their young children. So you may have some benefits in that policy you can use in other ways:
- You can maintain the policy in force under a provision called "extended term." In this case, you pay no more premiums - freeing up those dollars for other things - but continue being insured for the full policy amount. Sound retirement advice is to simply let the policy's accumulated cash value pay the premiums for a specified amount of time, after which the insurance protection will end. In this option you've freed up money and allowed the possibility leaving a legacy should you die during the remaining policy term.
- Equally sound retirement advice is to maintain the policy in force indefinitely by converting it to a paid-up policy. Here, you pay no more premiums, but the amount of insurance may be significantly reduced, yet permanent. The accumulated cash value remains intact so you retain the option of accessing it if necessary. Again, you've freed up money used for premiums and maintained some for a legacy or future cash
- You can annuitize the policy by exchanging its accumulated cash value for a payment plan with the insurance company. This provides you with a lifetime of income to add to other retirement income you have. This is retirement advice we usually do not give as insurance companies do not tend to pay very attractive interest rates. But it's always worth checking.
- You can access the policy's cash value through loans. A loan will reduce the death benefit and cash value of the policy. Again, you've freed up cash for your use.
- Lastly, you can take partial withdrawals or surrender the policy. Surrendering the policy outright allows you to receive its remaining cash value.
- Yet another piece of retirement advice is to pursue a life settlement. In such a case, another party buys your policy6 from you and hands you cash. They keep the policy in force and eventually collect the death benefit. Some policy holders get more this way than surrendering the policy to the insurance company.
Each of these pieces of retirement advice triggers its own tax consequence. But realizing what options there are is important to make put into place a good retirement plan for the years to come. Call your insurance company and order a "policy ledger" and then make an appointment to review the above options with your life insurance agent and your accountant.
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