Can You Use Your Life Insurance to Fund Your Retirement?

In many ways, your financial health in retirement depends on your ability to generate sufficient income to cover your expenses. If you’re like many retirees, your income will come from a variety of sources, including Social Security, savings and investments, and possibly even a company pension.

There could be times, though, when those income sources don’t cover all your expenses. You could face unexpected emergency costs, or volatile market swings could limit your income. In those times, you may find it helpful to utilize supplemental income, preferably in a tax-efficient manner.

One innovative strategy is to use your life insurance cash value to generate supplemental income. You may have purchased life insurance long ago, maybe when you first married or had children. Now you may be in a stage of life when you don’t need as much coverage. That reduced need could give you flexibility to use the policy’s cash value for retirement purposes.

Below are a few helpful ways in which you can utilize life insurance to create supplemental income after you retire. If you have life insurance with cash value, or if you’re considering a life insurance purchase, you may want to think about how this strategy could fit your needs.


The simplest approach may be to take withdrawals from the policy. This could be an option if you have held the policy for a long enough period of time that you no longer face surrender charges. Surrender charges are penalties that are often in place in the early years of a life insurance policy. If you withdraw more than a certain amount in any given year, you could pay a penalty. However, the penalties usually drop off after a certain amount of time has passed.

The tax treatment of your withdrawals depends on how the distribution is structured. Withdrawals of premium dollars are usually tax-free. Withdrawals of growth could be taxable, and they could also trigger early distribution penalties if you’re younger than age 59½.

Loan Distributions

Perhaps you’d like to take distributions from your life insurance policy in a way that’s tax-efficient. You can do that through your policy’s loan provision. Essentially, you borrow money from the policy’s cash value, with the promise to repay it. The distribution isn’t taxable or subject to penalty, because it’s a loan.

If you’re still paying premiums, your premium could be adjusted upward to reflect loan repayments. If you don’t repay the loan before you pass away, your death benefit could be reduced by the amount of your outstanding balance. If you don’t have much need for life insurance, however, you may not be concerned about a potential reduction.

Important Considerations

Supplemental income from a life insurance policy may not be the right strategy for everyone. There are important consequences to consider. One is that your loan distribution or withdrawal could create surrender penalties or even cancel the contract if you take it in the policy’s early years. Also, keep in mind that a loan distribution will likely have an interest rate attached to it, so you could end up repaying more than you borrowed.

Ready to explore life insurance as a potential supplemental income source? Let’s talk about it. Contact us today at Bridgeriver Advisors. We can help you analyze your needs and develop a strategy. Let’s connect soon and start the conversation.

Licensed Insurance Professional. This information is designed to provide a general overview with regard to the subject matter covered and is not state specific. The authors, publisher and host are not providing legal, accounting or specific advice for your situation. By providing your information, you give consent to be contacted about the possible sale of an insurance or annuity product. This information has been provided by a Licensed Insurance Professional and does not necessarily represent the views of the presenting insurance professional. The statements and opinions expressed are those of the author and are subject to change at any time. All information is believed to be from reliable sources; however, presenting insurance professional makes no representation as to its completeness or accuracy. This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice.

16769 - 2017/6/20

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