Life is invaluable and can’t be gauged in terms of value but the uncertainty of crisis in life is often unsettling. Opting for life insurance helps ease the stress and to protect our lives in terms of compensation and security and investing in more than one life insurance can be a great way to cater to your financial needs when you reach the age retirement
Different types of Life Insurance
Before investing in life insurance as a step towards retirement planning, it is essential to understand the different types of Life Insurance Plans available in the market. Life insurance can be broadly classified into two categories: term insurance and permanent insurance.
Term Insurance is insurance that protects life cover at a fixed rate or fixed amount for a specific time, the term. If the insured dies before the stipulated term, the beneficiary is eligible for the death benefit under the policy.
Permanent Insurance, on the other hand, provides a life cover as long as you live, with the ability to accumulate cash value.
Permanent Insurance can be further classified into two types, Whole Life Insurance Plans, and Universal Life Insurance Plans.
Whole Life Insurance Plans have fixed premiums each year for a fixed coverage whereas
Universal Life Insurance Plans offers flexible premiums benefit that lets the policyholder decide how much premium is paid each year.
Life Insurance as part of Retirement Planning
The process of retirement planning can be intimidating as there are various unforeseeable variables associated. Investing in life insurance as part of your retirement planning has been gaining popularity and rightly so. It is legal to own more than one life insurance policy and since certain life insurance policies now offer unit-linked returns under their plans, lucrative surrender benefits, intermittent withdrawals, more and more people are investing in multiple life insurances to provide retirement income. There are certain ways of creating retirement income through life insurance policy:
- Loans: The insurer can borrow money from the insurance provider while keeping the cash-accumulation as collateral. In some cases, this loan amount is non-taxable and the insured need not make payments on the loan. The downside of this is that it reduces the death benefit considerably. It is essential to note that a policy loan accruing interest decreases the cash value of the policy and the policy may lapse if premiums paid are insufficient to maintain the death benefit.
- Life Settlement: The insurer can sell a life insurance policy for cash to a life settlement company or an individual who in turn keeps the policy active by paying premiums and receives the stipulated death benefits at the time of original insurer’s death. This helps in liquidating your investment and creating a retirement income but also means that you have to forego your death benefit.
- Withdrawals: Some policies have provisions in place that allow certain intermittent withdrawals, once a specific threshold of time is passed since the purchase of the policy. This not only ensures certain payoff apart from the death benefit but also contributes to the secure returns under the policy. In some cases, early withdrawals are taxable, i.e. if the withdrawal is made before the first 15 years are complete from the date of purchase of the policy, the amount can be considered as taxable. Also, cash withdrawals, which can be considered as retirement income, lead to a reduced death benefit as the cash value decreases with each withdrawal unless the premiums amounts are increased to maintain the earlier set death benefit.
- Surrender: Each life insurance policy has certain surrender benefits associated with it. Under this provision, the insurer can surrender his/her life insurance policy to the insurance provider in return for cash, which can, in turn, contribute towards the retirement income. The surrender benefits often depend upon how long the insurer had the policy since the date of purchase. The longer the policy was in force, better the surrender benefits.
- ULIPs: Unit Linked Insurance Plans are combination plans that provide the dual benefit of life insurance as well as an opportunity to capitalize the investment on certain market tools such as stocks, bonds, and mutual funds. ULIPs offer a small lock-in period of 3 to 5 years, a post which partial withdrawals are allowed which can supplement income.
While creating retirement income through life insurance policy it is vital to consider how best to cash the policy so as to achieve maximum returns. Some options promise lucrative returns while some have certain grave repercussions. Investing in life insurance where you can make reap the maximum benefit with any of the methods is a smart step towards stress-free retirement. Hence it is pivotal to understand each investment product that you purchase as part of your retirement planning.