Did you know you can use life insurance as a pocket to pull from in retirement?
While your focus may currently be set on maxing out your RRSP (or GRSP/Pension at work), you may want to examine filling another pocket to complement those accounts while also helping with estate planning.
Let’s take a high-level look at the concept:
- You can buy a permanent life insurance policy and pay for it over 10 years, 20 years, until you retire, or for your entire life (you decide how long you want to pay for)
- Permanent life insurance policies can generate yearly dividends which can automatically buy paid-up additional insurance
- Both the original policy and the additional insurance will have a cash value associated with them
- You can use the cash value of a policy as collateral for a loan at a financial institution
- The death benefit from the policy can pay off that loan and leave extra for your estate
In summary, permanent insurance can have a cash value that you can use as collateral on a loan that the death benefit from your life insurance will pay off - aka retirement income.
If the concept above makes sense at a high level, the next step is understanding why you would use insurance for part of your retirement income.
1.You will need insurance anywayWhen you start a family or buy a home, investing in life insurance is a great way to provide peace of mind knowing that your family and your assets are taken care of in the event of an early passing. The funds of a life insurance policy could be used to pay off your mortgage or provide future income to ease some of your family’s worries.
For example: if you have a $500,000 mortgage and income replacement needs of $200,000, you may want to cover most of that with term insurance (think of it as renting insurance) to keep costs low. To cover your mortgage and income replacement needs, you could buy $700,000 of term insurance. You could also buy $600,000 of term and $100,000 of permanent. While the permanent insurance is going to be more of a financial investment than the term insurance, you are covering your family’s current needs while also preparing yourself for retirement.
2. Preparing while you are young and healthy
- The younger that you are, the easier it is to get life insurance since you are less likely to have health issues than someone who is more mature in age. Because of this assumption, an underwriter sees less risk for a younger and healthier person making it easier to obtain a policy.
- Why pursue life insurance while you’re young? Even if you have no health problems now, you could become less healthy in the future which would make you more of a risk in an underwriter’s eyes. While you may not know if you will need extra income in retirement now, you can still get coverage and have the option to use the policy for income down the road and if you don’t, your estate/beneficiary has more money to work with.
3. The investment does not go down in a market downturn
- Every year that your policy receives a dividend, it will buy additional paid-up insurance. Once you own that new insurance, the policy can’t go back down in cash value. So fast-forwarding to retirement, let’s say we have a year where the stock market is down, either by crashing, or just having a low year, and your RRSP or other investments are negatively impacted: this could be the year you choose to take a loan for income using your life insurance policy as collateral (with no need to pay back the loan as the life insurance will do that in the future). While the rest of your investments have gone down, your life insurance cash value is still worth the same amount. Currently the projected policy dividend rate ranges from 5-6% a year depending on which insurance company you place your policy with.
Permanent insurance may fit into your plan and it is worth starting the discussion. Connect with an advisor at HMA The Benefits People and we would be happy to walk you through the details and see if this will fit within your financial plan. We are happy to help and there is no pressure on you to commit.