Income is at the heart of any retirement plan. In many ways, your financial stability in retirement depends on your ability to generate consistent income to support your expenses. If you’re like many retirees, you will likely depend on income from sources such as Social Security, employer pensions and your own savings.
Unfortunately, you may find that those sources don’t provide enough income to meet your needs. That could be especially true during times in which you face unexpected costs or volatile market swings. In those times, you may find it helpful to utilize supplemental income, preferably in a tax-efficient manner.
One unique strategy is to use your life insurance cash value as a supplemental income source. You may have purchased life insurance long ago, maybe when you first married or had children. If your children are grown, you may not need as much coverage as you did in the past. That reduced need could give you flexibility with how you use the cash value inside the insurance policy.
Below are a few helpful tips on how 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.
Life Insurance Withdrawals
Maybe the simplest way to create supplemental income from life insurance is to take a withdrawal. 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.
You can usually withdraw your premiums from a life insurance policy without facing any tax consequences. You can also withdraw growth from your policy, but that distribution could be taxable, and it could trigger early distribution penalties if you’re younger than 59½.
Life Insurance Loan Distributions
Perhaps you’d like to take distributions from your life insurance policy but to do so in a way that doesn’t create a tax liability. You can do that through your policy’s loan provision. Essentially, you borrow money from the policy’s cash value. The distribution isn’t taxable or subject to penalty, because it’s a loan. You technically have to repay the money into the policy.
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. However, if you don’t have much need for life insurance, you may not be concerned about a potential reduction.
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 them 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. 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.
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