What is cash value life insurance and how does it work?

Cash value life insurance (whole life universal life, or variable universal life), is a type of permanent life insurance. Unlike term life insurance, which only lasts for a certain number of years, permanent life insurance offers the potential for lifetime protection and has a cash value component that grows over time. The cash value is the portion of your premium that is invested by the insurance company and earns interest or if the policy is variable universal life, a portion of the premium is invested in subaccount options of your choosing. You can access the cash value of your policy through loans or withdrawals, without paying taxes on the growth.¹

How to use cash value life insurance as a source of income in retirement

One of the benefits of cash value life insurance is that you can use the cash value of your policy to supplement your retirement income, in addition to your other sources of income such as Social Security, pensions, and investments. You can also use it to cover unexpected expenses, fund your hobbies, travel, or donate to your favorite causes. You can access the cash value of your policy in a tax advantaged manner, however, you have to pay interest on any loans you take from your policy, and you have to repay them, or your beneficiaries will receive a reduced death benefit, or your policy may lapse.

The pros and cons of using cash value life insurance for retirement income

Some of the pros of using life insurance for retirement income are:

• You can diversify your retirement portfolio and reduce your tax liability
• The life insurance cash value may earn a guaranteed rate or minimum depending on the policy
• In retirement accessing other non-market sources for supplemental income can help your retirement assets recover after down market years

Some of the cons of using cash value life insurance for retirement income are:

• The cost of insurance is typically higher than term life insurance, which can reduce your cash flow and savings potential
• You have to qualify for life insurance through underwriting
• You have to pay interest on any loans you take from your policy, which can reduce your cash value and death benefit
• You have to repay any loans or withdrawals you take from your policy, or your beneficiaries will receive a reduced death benefit, or your policy may lapse

Is cash value life insurance a good fit for your retirement portfolio?

Cash value life insurance can be a smart way to boost your retirement income, but it is not for everyone. It depends on your financial goals, risk tolerance, budget, and need for death benefit protection. You should consult a financial professional before buying a cash value life insurance policy and compare it with other options such as term life insurance, annuities, or Roth IRAs. You should also review your policy regularly and adjust it as your needs change.