Living comfortably during your golden years is not just about relying on social security but setting up robust retirement income sources. Traditional methods involve retirement funds like a 401(k) or Roth IRA. However, a less-known yet potent means of boosting retirement income is life insurance. Apart from offering payouts to your heirs upon your death, certain life insurance plans can bolster your retirement funds and provide tax benefits.
These specific life insurance policies function as extra retirement funds sources, providing tax-exempt income if adhering to the rules. They make your financial portfolio less reliant on market dynamics and offer financial security during unforeseen circumstances, allowing loans against your balance, usually at more favorable rates than other loan types.
It's important to differentiate between term life and whole life insurance. Term life insurance is cheaper and purely provides death benefits, covering set periods like 10, 20, or 30 years. However, it does not contribute towards retirement.
Whole life insurance, on the other hand, lasts your entire life, providing not only death benefits but growing in value with payments. This growth is typically tax-deferred. The premium for whole life insurance depends on your coverage amount, age, and health condition and remains constant once calculated.
Whole life insurance policies can enhance retirement income via their dividends, paid when the company is profitable. The cash value of the policy becomes substantial after several years, and policyholders can take loans against their policy, reducing its cash value and death benefits. This is why they are favored as investment tools on behalf of children with low premiums.
Universal life insurance is another variant, providing death benefits and value accumulation. It differs in its flexibility, allowing for premium adjustments and growth through interest and decreased insurance costs. This growth is also tax-free.
Including whole life and universal life insurance policies as retirement income sources along with 401(k), Roth IRA, or Social Security can provide a significant fund balance upon retirement, immune to direct impacts from the stock market.
However, any withdrawals or loans will affect the funds available to your beneficiaries upon your death. Speaking on its significance, Craig Ferrantino of Craig James Financial Services stated that investment-grade life insurance is relatively stable compared to other investments. This is due to their private nature and evaluation by external agencies measuring their cash liquidity.
These policies also offer financial security owing to their death benefits, providing assurance that any outstanding liabilities won't burden your loved ones. Universal life policies protect policyholders from market downturn losses, adding a layer of security.
Investors are advised not to put all their retirement investments in one basket. Holding a whole life insurance policy pays dividends and is majorly independent of market forces. This can provide longevity protection as assets won't deplete in one's lifetime.
The IRS allows the cash value of a life insurance policy to be moved to a similar policy without tax impacts, if the policy is no longer beneficial.
In retirement planning, the best income source would ideally continue for life and can come from a pension from a former employer or an IRA that was contributed to over many years. There isn't a 'best investment.' Your retirement income will ideally come from various sources including retirement accounts and life insurance policies, providing more than just peace of mind due to the death benefit they offer but also serving as a lucrative income source.