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Working Funds: 3 Ways to Cash in on Life Insurance for Retirement

The good news is that you don't have to die to use your Life Insurance. Here's how to put the new policies to work for you.
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The good news is that you don't have to die to use your Life Insurance.
Here's how to put the new policies to work for you.

Old school insurance: You die, your beneficiary gets your death benefit. A prime example of this is the free $50,000 term policy you may get from work. To be expected, you have to die to use it which is all well and good for your beneficiaries. But for you yourself? Not so much.

In contrast, newer kinds of life insurance policies offer several benefits that you can use while you are still breathing . . . think cash value, living benefits, and lifetime income options. It may sound crazy but you could even potentially retire off a life insurance policy.

I'm not pitching any specific product or company here but merely hitting the highlights. Of course, not all companies or all policies will offer the same benefits and you'll probably want some advice from a savvy financial professional who keeps up to date on what is available. (Fair warning: not all of them do.) But the right life insurance riders (additional added benefits) can provide more options than you may have previously imagined, increasing your odds of coming out ahead financially while you're still among the living.

Here are my three favorites:

Option 1: RICH PEOPLE ROTH - I basically call the cash value on permanent life insurance a "Rich People ROTH" because it's most useful for people who make too much money to use a regular Roth IRA, or for those who have already maxed out their other retirement accounts and want to save more money tax efficiently.

Essentially, if you set up the policy properly you could save any amount you want into the life insurance policy, and the cash value would be treated basically like a ROTH. That means your contributions not only grow tax-free but come out tax-free too.

Option 2: LIVING BENEFITS - There are a bevy of health-related living benefits and riders that can be added to policies at difference insurance companies. The three most common benefits cover Terminal Illness, Chronic Illness and Critical Illness. I won't bore you will all fun diseases and ailments that may be covered. Just know that financially it can be much more expensive to suffer for years with a chronic illness versus simply passing away too soon (which has some definite downsides too).

No one buys insurance hoping to get sick but rather to diminish the potential for financial devastation that can occur if you do, particularly later in life. Since health insurance can't do it all, these living benefits will help you have more options to cover costs that can grow exponentially.

Option 3: PERSONAL PENSIONS - You can also strategically use the cash value as a personal pension. Some policies will have a "lifetime income rider." If you plan ahead and stash enough cash into the policy, you can essentially create your very own pension that comes out to you tax-free.

The LGBT Life Insurance Picture
As a community, LGBT people tend to be underinsured at a greater rate than the rest of the country. But the new options on today's life insurance policies may make them a better fit for both the coupled and the single. I bought my first policy long before I met my handsome husband.

Also as life expectancy has increased, premiums have decreased. I've reviewed several policies sold in the 80's and was able to get lower premiums and better coverage on a new policy even with my client being nearly 30 years older. This means that even old policies may deserve a review.

Most of us hope to die peacefully in our sleep ¬- preferably after a lovely meal with lots of carbs and plenty of wine ¬- when we are 100+ years old. I wish this for myself and I wish this for my husband and I wish it for you. But meanwhile, since there are no guarantees, a good life insurance policy can make the best of the uncertainties that are part and parcel of being alive.

DAVID RAE, CFP®, AIF® is a retirement planning specialist with Trilogy Financial Services which manages over $3 billion of client assets. He has been helping people reach their financial goals for over a decade. Follow him on Twitter @davidraecfp on Facebook or via his website,


Securities and advisory services offered through National Planning Corporation (NPC), Member FINRA, SIPC, a Registered Investment Advisor. Trilogy and NPC are separate and unrelated entities.

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