The primary function of a life insurance is to endow financial security to your recipients after your death. On the other hand, apart from simple income substitute, some kinds of life insurance contracts which include other features that permits access to finances during your lifetime. If managed and funded suitably, with the purpose to save money for retirement, a life insurance policy can give added savings accrual.
Permanent Life Insurance
Permanent life insurance is the only type of policy that has the knack to build up equity. Term insurance policy is trivial and insignificant unless the insured person passes away while the policy is still in effect. Policies such as whole life, universal life and variable life insurance are policies that are intended to stay in effect all through your entire existence rather than for just a specific period, and they generate equity in the form of cash value that can be obtained by the policy holder. If adequate cash value builds up, any excess amount of money not required uphold the policy may be withdrawn and spent to add-on other retirement plans.
Cash Value Accumulation
Each time you make payments to your permanent life insurance, a part of the premium is being saved in a different account, the cash value portion. Varying on the type of policy you hold, that funds will be invested on your behalf and the entire value of the account will also augment in time. Given that permanent life insurance premiums are designed to cover your death benefit, you will be compelled to pay more than minimum premium to amass greater cash value.
Withdrawing Money
Once you finally arrive at your retirement age and all set to start withdrawing what you have collected in your policy, you are obliged to inform the insurer about your intention to withdraw the cash value of your policy. You will be asked to fill out few basic forms stating the frequency and mode in which you want to make withdrawals. But always remember that by cashing out the money from the cash value portion of your policy, your death benefit will be lessen and will leave your beneficiaries less amount of money. Moreover, if you cash in too much money the policy may lapse caused by insufficient funding.
Tax Ramifications
Cashing out your current insurance policy usually does not give rise to your taxable income, as long as the original contract remains in effect, and the sum withdrawn is below your policy’s death benefit. To dodge negative income tax consequences, uphold your life insurance policy. Furthermore, make certain that the insurance company is notified about your cash accumulation plans when the policy is acquired so it can compose the contract aptly to help you evade possible income tax setbacks when you make withdrawals.
Considerations
Although a permanent life insurance policy provides an enticing tax-advantaged means of investing your hard earned money for your retirement but it should not be your only investment vehicle. If you will not provide your insurance policy a sufficient fund, you will not accumulate sufficient cash value to completely support your retirement. In addition, compared to other kinds of market instruments such as stocks and mutual funds, life insurance policies basically do not proffer the potential for extensive profits. Your existing retirement savings should be branched out between a combination of investments that include life insurance as well as mutual funds, stocks, annuities and other high-yield vehicles.
