5 Ways Permanent Life Insurance Can Help You in Retirement

2. Get ongoing retirement income

Some whole life policies allow you to receive a regular payment rather than taking a lump-sum distribution. That steady stream of cash could supplement your Social Security benefit or other retirement income, and it’s generally tax-free, provided the amount of funds you receive do not exceed the premiums you’ve paid for the policy.

Beware of two caveats, though. First, under IRS rules, not every permanent life insurance policy can provide this ongoing income option. “It matters how the policy is structured,” Monahan says. Ask your agent if a policy you are considering or already own qualifies.

Second, the payments you receive over time come out of the death benefit. Say you have a $500,000 whole life policy, and your daughter is the sole beneficiary. Then assume you convert a portion of the death benefit into a $1,000 monthly payout for yourself. If you did that for 10 years before dying, you would have tapped into $120,000 worth of your policy’s cash value, and your daughter would receive $380,000.

3. Cover costs of long-term or critical care

“A common misconception is that insurance policies are just like they’ve always been,” Monahan says. “But there’s actually been a ton of change in the industry. Hybrid life insurance that can also pay for long-term care — those are relatively new products.”

Hybrid policies, a form of permanent life insurance, allow policyholders to convert their cash value to use in paying for nursing home care or skilled nursing in your home. That can help you address a major financial gap many retirees face.

According to insurance provider Genworth, which tracks long-term care expenses, the median annual cost of living in a nursing home in 2021 was $94,900 for a semiprivate room and $108,405 for a private room. By 2030, the company forecasts, those costs will rise to $123,823 and $141,444, respectively.

About half of nursing home residents are there for at least a year, and more than 1 in 5 stay for nearly five years, according to the Health in Aging Foundation.

You could also buy a permanent life policy with an accelerated death benefit rider. With this provision, you can tap into the death benefit “to pay for any terminal, critical or chronic life event,” says Rex Jackson, an accredited investment fiduciary and founder of IE Invests in Redlands, California.  

“You get the funds 100 percent tax-free,” he says, “without having to destroy your 401(k), touch other accumulated assets or sell a home you’re trying to hang onto.”

4. Draw dividends

Just as people who buy preferred stock can get dividend payments, so, too, can owners of whole life policies get annual dividends. These typically are policies sold by mutual insurance companies, which are owned by policyholders. 

You have multiple options for using your dividends. You can take them in cash, apply them to your premium payments, reinvest them in your policy to build cash value at a faster clip, or plow them into purchasing additional coverage to leave a bigger death benefit for your loved ones. 

5. Secure tax benefits

The cash value in a permanent life policy grows on a tax-deferred basis, and in most situations you can access it tax-free.

Money you take out as a loan from your life insurance is not taxed as long as the policy remains in force. Money you withdraw, whether on a lump-sum basis or as a monthly income stream, isn’t taxable either, as long as the payouts are less than the total premiums you’ve paid for the policy. 

Furthermore, your beneficiaries don’t owe income taxes on the insurance payout they get after you die. 

Dividends you draw from a whole life policy are tax-free, too — again, as long as they don’t exceed your premium payments. Under tax law, they are not treated as income, but as overpaid premiums being refunded to policyholders. If the dividends are greater than your total premium payments, however, the excess is taxable.