2. Obtaining a continuous retirement income
Some whole life policies allow you to get regular payments instead of a lump sum distribution. This continuous cash flow can supplement your Social Security benefits or other retirement income, and is generally tax-free, provided the amount of money you receive does not exceed the premiums you paid for the policy.
However, beware of a couple of caveats. First, under IRS rules, not every permanent life insurance policy can provide this continuing income option. “It is important how the policy is structured,” says Monahan. Ask your agent if the policy you are considering or that you have actually qualifies.
Second, the payments you receive over time come from a death benefit. Let’s say you have a $500,000 term life insurance policy, and your daughter is the sole beneficiary. Then suppose you convert a portion of your death benefit into a $1,000 monthly benefit for yourself. If you did this for 10 years before you died, you would have benefited $120,000 in the cash value of your trust, and your daughter would have received $380,000.
3. Coverage of critical or long-term care costs
“There’s a common misconception that insurance policies are the same as they’ve always been,” says Monahan. “But there’s actually been a lot of change in the industry. Hybrid life insurance that can also pay for long-term care — these are relatively new products.”
Hybrid policies, a form of permanent life insurance, allow policyholders to convert their cash value to be used to pay for hospice care or skilled nursing in your home. This can help you address a significant financial hole that many retirees face.
According to the insurance company Genworth, which Tracks long-term care expenses, the average annual cost of living in a nursing home in 2021 was $94,900 for a semi-private room and $108,405 for a private room. By 2030, the company expects these costs to rise to $123,823 and $141,444, respectively.
About half of residents in nursing homes have been there for at least a year, and more than 1 in 5 have been for about five years, according to the Health in Aging Foundation.
You can also purchase a permanent life policy with a quick death benefit rider. With this provision, you can take advantage of a death benefit “to pay for any emergency, serious or chronic life event,” says Rex Jackson, a certified investment agent and founder of IE Invests in Redlands, California.