There’s a saying when it comes to life insurance: “What would you like your life insurance to do for you?” It replaces income, can pay for long term care expenses, and can supplement your retirement income, among other things.
Life insurance is a part of your overall financial planning and your needs may change as you enter your mid-career years.
The question to ask in mid-career is: has your life outpaced your insurance coverage?
You may be surprised how much life insurance it takes to cover your current interests, which may have grown in the last 10-20 years since you entered the workforce. That’s why career building and insurance planning should be considered in tandem.
Take a typical dual income household. Let’s say each spouse earns $70,000 per year. Assuming 20% for income taxes, that leaves $70,000 x 80% = $56,000 in annual income or $4,667 in monthly income per spouse. The combined monthly household budget may be double that, around $9,300.
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Tax-Free Retirement Income
In the same way one may use the accumulated cash value in a life insurance policy to pay for long term care expenses, there are no restrictions on the use of policy cash value. It can be used to supplement retirement income–as an additional layer of income stacked on top of Social Security–and if taken as a loan (not a withdrawal from the policy), the income is tax-free.
Using life insurance for tax-free retirement income, called a life insurance retirement plan or LIRP, is one thoughtful way to help insulate your income needs against the risk of higher income tax rates.
Note: Using a policy’s cash value for outside-the-policy needs, such as for retirement income, can be a viable financial strategy but it needs to be pursued with care.
A policy’s cash value is primarily designed to sustain the policy’s death benefit–the primary purpose of a life insurance policy. Unless the policy is designed for outside cash use, draining a policy of cash value may lead to the policy lapsing prior to the insured’s death which may trigger a taxable event for the owner of that policy.