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Life insurance for retirement: How it can supplement your strategy

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As part of your financial plan for your family's future, you may have purchased life insurance—a tool that mainly works to provide financial security for your loved ones after you pass away. Your life insurance may also be able to help you supplement your retirement income.

Certain permanent life insurance contracts let you build tax-deferred cash value over time. To supplement your income, you may want to consider borrowing this cash value.

Here's what to know about using your life insurance for retirement.

Life insurance contracts that have cash value

Permanent life insurance accumulates cash value by holding a portion of your premiums in an account that can grow either interest or earnings tax-deferred over time.

These contracts include a cash value component, though each accumulates it differently:

  • Whole life insurance has set premium payments and a cash value that is guaranteed to grow. It also has the potential for dividends.
  • Universal life insurance has flexible premium payments, and your cash value earns interest at a rate that may change over time, never to be less than the guaranteed minimum.
  • Variable universal life insurance is similar to universal life, except you can choose which market subaccounts you want to invest in, which means you have market-related growth (and loss) potential.

Because universal and variable universal life insurance let you change your premium amount, reducing your payments can affect your death benefit and cash value.

How you can use cash value life insurance in retirement

Your life insurance's cash value is money you can withdraw or borrow. There are no restrictions on how you spend it. You could use it to:

  • Supplement your Social Security or retirement distributions.
  • Cover unexpected expenses such as medical bills.
  • Take a tax-advantaged loan to repay debts or fund a project.
  • Pay for extended health care expenses such as assisted living or in-home services.
  • Fund your premiums to keep coverage going without out-of-pocket costs.
  • Invest in other options that may better help you reach your financial goals.

Withdrawing and borrowing from your life insurance has trade-offs. For one, money taken from your contract's cash value reduces the death benefit. Also, any funds you don't replace aren't included in the death payout to your beneficiaries.

What is your retirement withdrawal strategy?

A clear retirement withdrawal strategy can help you maximize your hard-earned savings. 
Explore different withdrawal strategies.

Pros & cons of using life insurance for retirement

Can life insurance be used for retirement savings? Of course. But should you do it? It's an individual decision. Understand the advantages and disadvantages and how using your life insurance cash value works in the context of your overall goals.

Advantages of using life insurance for retirement

  • Unlike other retirement accounts, the amount of money you can put into your life insurance each year depends on the size of the contract. It is not capped at a set amount or income based like some retirement accounts (e.g., Roth IRA contribution eligibility.)
  • Your cash value's growth is tax-deferred, similar to a 401(k), traditional individual retirement account (IRA) and other non-Roth retirement accounts. But you don't have to wait until age 59½ to withdraw funds from life insurance.
  • Some retirement accounts have required minimum distributions, requiring yearly withdrawals at a certain age. Life insurance contracts don't.
  • Life insurance riders may be available that allow you to use your cash value to help cover long-term care costs and chronic or critical illnesses.

Disadvantages of using life insurance for retirement

  • Life insurance contracts with cash value features typically have higher premiums than term contracts.
  • Investment options within your life insurance contract may offer lower interest rates or returns than other investment possibilities.
  • Any cash value you withdraw or borrow and don't repay reduces your death benefit.

How taxes work with cash value life insurance

When it comes to using your life insurance cash value, you can withdraw some of it, take a loan from it or cash it out entirely by surrendering the contract.

It's vital to understand the tax implications of each. You paid your life insurance premiums with after-tax dollars. But your cash value grows tax-deferred interest and earnings, which means you owe taxes on those when you withdraw them.

Depending on how you take money from your life insurance, these are common tax scenarios you may encounter:

Partial withdrawals of cash value can be taxed as income

You can take out any amount up to the total you've paid in premiums tax-free. For any amount over the premium total—i.e., the interest or earnings—you have to pay regular income tax.

Loans against cash value can be taxed and accrue interest

Like a partial withdrawal, you can take a tax-free loan up to the amount of the premiums you've already paid. Anything borrowed beyond that may be subject to income taxes.

You usually have to pay interest on the borrowed amount. You may need to make regular interest payments or deduct the interest from your remaining cash value. If those interest payments deplete your cash value, however, your contract could lapse, leaving you with full tax responsibilities and no life insurance coverage.

Total withdrawal or surrender

You can also take out all of your cash value and receive the surrender value of your life insurance by ending your contract. While this may give you the windfall you're looking for, you may have to pay surrender fees and income tax on all the interest or earnings at once. You also won't have coverage anymore.

Who should tap life insurance cash value for retirement?

For some people, using life insurance to build or supplement retirement income may align with their goals, risk tolerance and general investment style. However, this strategy may not be right for everyone.

Here are some instances where it could be something to explore:

  • If you're a high-net-worth investor, you may have maxed out other tax-advantaged options, like a 401(k) or IRA. A permanent life insurance contract can provide another opportunity for tax-deferred growth and tax-free withdrawals for any amounts under your total premium contribution.
  • Withdrawing money before age 59½ usually triggers fees and tax penalties in retirement accounts. Life insurance gives you a way to withdraw or borrow at any age and can be tax-free if it's less than your total premium contribution.
  • If you're worried about outliving your retirement savings, using your cash value can be an option to rearrange your savings and investments to set yourself up with additional monthly income.
  • Your cash value investment options in life insurance may not be working to their full potential, or they may no longer fit your risk tolerance. You may want to be more conservative and switch to a certificate of deposit or fixed annuity (particularly a multi-year guaranteed annuity) because they can offer set growth over a period of time. On the flip side, you may be looking for something more aggressive, such as dividend-paying stocks that have market growth (and loss) potential.

More info on how to use life insurance for retirement

When considering life insurance that builds cash value, understand the contract, the fees involved and the potential benefits and drawbacks. Also, consider the primary purpose of life insurance for you and your family. It can make a difference if you set out using it as a long-term savings vehicle versus financial protection via a death benefit.

A financial advisor can help you look at your big-picture finances and determine if using life insurance for retirement income aligns with your needs and strategy. Get in touch with a Thrivent financial advisor to learn more.

Thrivent and its financial advisors and professionals do not provide legal, accounting or tax advice. Consult your attorney or tax professional.

Loans and surrenders will decrease the death proceeds and the value available to pay insurance costs which may cause the contract to terminate without value. Surrenders may generate an income tax liability and charges may apply. A significant taxable event can occur if a contract terminates with outstanding debt. Contact your tax advisor for further details. Loaned values may accumulate at a lower rate than unloaned values.

Guarantees based on the financial strength and claims-paying ability of Thrivent.

This contract has exclusions, limitations and terms under which the benefits may be reduced, or the contract may be discontinued. For costs and complete details of coverage, contact your licensed insurance agent/producer.

Thrivent financial advisors and professionals have general knowledge of the Social Security tenets. For complete details on your situation, contact the Social Security Administration.

If requested, a licensed insurance agent/producer may contact you and financial solutions, including insurance may be solicited.

Investing involves risk, including the possible loss of principal. The prospectus and summary prospectuses of the variable universal life contract and underlying investment options contain information on investment objectives, risks, charges and expenses, which investors should read carefully and consider before investing. Available at