5 Ways Life Insurance Can Complement Your Retirement Planning

Talk to one of our experienced advisors today!

11 minute read

Originally published: May 6, 2024

Get life insurance with multiple sclerosis in Canada

5 Ways Life Insurance Can Complement Your Retirement Planning

Talk to one of our experienced advisors today!

12 Minute read

Originally published: May 6, 2024

Get life insurance with multiple sclerosis in Canada

When planning for retirement, many of us focus on the usual suspects: savings accounts, RRSP, and pensions. But there’s another tool that can enhance your financial security during your golden years – life insurance.  Traditionally viewed as protection for your loved ones after your passing, life insurance can play many roles in your retirement strategy. 

This blog will look into five ways life insurance complements your retirement planning, helping you maintain your lifestyle no matter what life throws your way. From providing tax benefits and emergency funds to ensuring your estate is passed on as you wish. 

In this article:

Tax Benefits of Life Insurance 

Life insurance policies offer a major tax advantage: the death benefit, the money paid out upon the death of the insured, is generally tax-free to the beneficiaries. This feature is significant because it ensures that the policy payout is not diminished by taxes, preserving the full financial value of the benefit.

For many families, the tax-free status of life insurance proceeds means that they can use the entire sum to stabilize their financial situation after the loss of a loved one. This is particularly important in cases where the deceased was the primary breadwinner, or had significant debts or ongoing financial obligations.

Case Study: John’s Journey to Life Insurance 

Meet John, a father and husband with a life insurance policy valued at $500,000. John has been contributing to this policy with the intention of providing for his family in the event of his untimely death. Before John's Passing: John is worried about the impact of probate fees on the assets he intends to pass on to his wife, Sarah, and their two children. He's aware that these fees can reach up to 40% for significant estates, depending on provincial and federal tax regulations. After John's Passing: John's life insurance policy pays out $500,000 directly to Sarah. Because life insurance proceeds are generally exempt from income tax, Sarah receives the entire amount without any deductions for taxes. This tax-free benefit contrasts sharply with other potential inherited assets, like a retirement account or investment fund, which might be subject to various taxes. With the $500,000 tax-free money, Sarah is able to pay off the remaining mortgage on their family home, ensuring housing security. She also sets aside funds for their children’s college education and invests a portion to generate income for future needs. Impact on Retirement Planning and Estate Management: The tax-free nature of the life insurance payout means that Sarah does not need to sell other assets to cover tax liabilities, allowing her to manage her late husband's estate more effectively. Additionally, she can use the funds to help her own retirement account, knowing that her immediate financial needs are covered. This strategic use of the insurance payout helps maintain the family's standard of living and secures their financial future.

Meet John, a father and husband with a life insurance policy valued at $500,000. John has been contributing to this policy with the intention of providing for his family in the event of his untimely death.

Before John’s Passing: John is worried about the impact of probate fees on the assets he intends to pass on to his wife, Sarah, and their two children. He’s aware that these fees can reach up to 40% for significant estates, depending on provincial and federal tax regulations.

After John’s Passing: John’s life insurance policy pays out $500,000 directly to Sarah. Because life insurance proceeds are generally exempt from income tax, Sarah receives the entire amount without any deductions for taxes. This tax-free benefit contrasts sharply with other potential inherited assets, like a retirement account or investment fund, which might be subject to various taxes. With the $500,000 tax-free money, Sarah is able to pay off the remaining mortgage on their family home, ensuring housing security. She also sets aside funds for their children’s college education and invests a portion to generate income for future needs.

Impact on Retirement Planning and Estate Management: The tax-free nature of the life insurance payout means that Sarah does not need to sell other assets to cover tax liabilities, allowing her to manage her late husband’s estate more effectively. Additionally, she can use the funds to help her own retirement account, knowing that her immediate financial needs are covered. This strategic use of the insurance payout helps maintain the family’s standard of living and secures their financial future.

Acting as a Source of Emergency Funds

Certain types of life insurance policies, such as whole life or universal life, offer a feature that can be extremely beneficial beyond just the death benefit: they accumulate cash value over time. This cash value is part of the premium payments you make that is set aside in a tax-deferred account within the policy. As this cash value grows, policyholders have the option to borrow against it, effectively using their life insurance as a personal loan source.

The ability to borrow against the cash value of a life insurance policy provides a flexible financial resource that policyholders can tap into when needed. This can be particularly valuable in emergencies or during retirement when liquidity is as crucial as income stability.

Case Study: Linda’s Journey to Life Insurance

Meet Linda, a retiree who has been paying into a whole life insurance policy for several decades. Over the years, her policy's cash value has grown significantly due to her consistent premium payments and the interest accrued within the policy. Situation: Linda faces a medical emergency that results in high out-of-pocket expenses not fully covered by her health insurance. Additionally, she needs to make some urgent repairs to her home. Using Life Insurance Cash Value: Instead of depleting her savings or selling off investments, which might incur taxes or result in a loss from selling at market lows, Linda decides to borrow against the cash value of her life insurance policy. She takes out a loan from her policy sufficient to cover the medical bills and home repairs. This loan does not require a credit check or a lengthy approval process, as it’s secured against her policy’s cash value. Linda is able to access the funds quickly, which is crucial in emergency situations. Benefits and Considerations: The interest rates on these loans are typically lower than those on personal loans or credit cards. Furthermore, if Linda chooses not to repay the loan, the amount will simply be deducted from the death benefit when she passes away, without impacting her current lifestyle. However, it’s important for Linda to consider the impact this might have on the beneficiaries of her policy, as the outstanding loan amount plus interest will reduce the death benefit. Long-term Impact: By opting to use her life insurance’s cash value, Linda maintains her other investments, allowing them to potentially grow or recover, and avoids creating taxable events. Her retirement savings remain intact, and her financial plan stays on track.

Meet Linda, a retiree who has been paying into a whole life insurance policy for several decades. Over the years, her policy’s cash value has grown significantly due to her consistent premium payments and the interest accrued within the policy.

Situation: Linda faces a medical emergency that results in high out-of-pocket expenses not fully covered by her health insurance. Additionally, she needs to make some urgent repairs to her home.

Using Life Insurance Cash Value: Instead of depleting her savings or selling off investments, which might incur taxes or result in a loss from selling at market lows, Linda decides to borrow against the cash value of her life insurance policy. She takes out a loan from her policy sufficient to cover the medical bills and home repairs. This loan does not require a credit check or a lengthy approval process, as it’s secured against her policy’s cash value. Linda is able to access the funds quickly, which is crucial in emergency situations.

Benefits and Considerations: The interest rates on these loans are typically lower than those on personal loans or credit cards. Furthermore, if Linda chooses not to repay the loan, the amount will simply be deducted from the death benefit when she passes away, without impacting her current lifestyle. However, it’s important for Linda to consider the impact this might have on the beneficiaries of her policy, as the outstanding loan amount plus interest will reduce the death benefit.

Long-term Impact: By opting to use her life insurance’s cash value, Linda maintains her other investments, allowing them to potentially grow or recover, and avoids creating taxable events. Her retirement savings remain intact, and her financial plan stays on track.

Income Replacement

Life insurance ensures the financial stability of dependents or a surviving spouse after the death of the primary earner. The payout from a life insurance policy replaces the income that was lost, helping to maintain the household’s financial status and allowing long-term plans like retirement to stay on track.

Case Study: Jessica’s Journey to Life Insurance 

Meet Jessica, whose husband was the main income earner. After his unexpected passing, Jessica was left to manage both daily expenses and future financial plans on her own. Fortunately, her husband had a life insurance policy that provided a substantial payout upon his death. This payout effectively replaced his income, allowing Jessica to pay off their home mortgage, cover living expenses, and continue funding her retirement account. This financial support helped preserve her standard of living and kept her financial goals achievable. This shows the vital role life insurance plays in replacing income and securing financial stability for survivors.

Meet Jessica, whose husband was the main income earner. After his unexpected passing, Jessica was left to manage both daily expenses and future financial plans on her own. 

Fortunately, her husband had a life insurance policy that provided a substantial payout upon his death. This payout effectively replaced his income, allowing Jessica to pay off their home mortgage, cover living expenses, and continue funding her retirement account. This financial support helped preserve her standard of living and kept her financial goals achievable. This shows the vital role life insurance plays in replacing income and securing financial stability for survivors.

Supplementing Retirement Income

Permanent life insurance policies, such as whole life or universal life, not only provide a death benefit but also build cash value over time. This cash value accumulates from part of the premiums paid into the policy and grows on a tax-deferred basis. For retirees, this accumulated cash value can become a significant asset, serving as an additional source of income. Retirees can tap into this cash value through policy loans or withdrawals, which can be strategically used to supplement retirement income, especially in times when other investments may be underperforming or during periods of market volatility.

Case Study: Robert’s Journey to Life Insurance

Meet Robert, a retiree who has a portfolio of investments that includes stocks and bonds. During a year when the stock market is particularly volatile, Robert notices that his investment income is lower than expected, impacting his ability to cover all his living expenses. Instead of selling his investments at a low point and potentially incurring losses, Robert turns to his whole life insurance policy. Over the years, his policy has accumulated a significant amount of cash value. Robert decides to take a policy loan to cover the shortfall in his income. This loan provides him with the needed funds without disrupting his other investments, allowing them time to recover in value. Also, the loan from his life insurance doesn't require monthly repayments, and any unpaid balance will simply be deducted from the death benefit. This approach gives Robert the flexibility to manage his income efficiently, ensuring that he maintains his standard of living throughout retirement.

Meet Robert, a retiree who has a portfolio of investments that includes stocks and bonds. During a year when the stock market is particularly volatile, Robert notices that his investment income is lower than expected, impacting his ability to cover all his living expenses. Instead of selling his investments at a low point and potentially incurring losses, Robert turns to his whole life insurance policy.

Over the years, his policy has accumulated a significant amount of cash value. Robert decides to take a policy loan to cover the shortfall in his income. This loan provides him with the needed funds without disrupting his other investments, allowing them time to recover in value. Also, the loan from his life insurance doesn’t require monthly repayments, and any unpaid balance will simply be deducted from the death benefit. This approach gives Robert the flexibility to manage his income efficiently, ensuring that he maintains his standard of living throughout retirement.

Estate Liquidity and Legacy Planning

Life insurance plays a role in estate planning by providing liquidity at the time of the policyholder’s death. This liquidity is especially important for paying estate taxes and other settlement costs without the need to liquidate other estate assets. Since estate taxes can be substantial and typically require payment within a short period after death, having immediate access to liquid funds from a life insurance policy ensures that a retiree’s other assets, like a family home, stocks, or business interests, can remain intact and be passed on to heirs according to the retiree’s wishes. This strategic use of life insurance helps in preserving the value of the estate and maintaining the financial integrity of the legacy intended for the heirs.

Case Study: Margaret’s Journey to Life Insurance

Meet Margaret, a retiree who owns a valuable family home and several investment properties. She is concerned about the potential burden of estate taxes on her heirs, which could force the sale of these properties. Margaret wisely secures a life insurance policy with a death benefit large enough to cover expected estate taxes and other related costs. When Margaret passes away, the proceeds from her life insurance policy are immediately available to her heirs. They use these funds to pay the estate taxes and other expenses. As a result, Margaret’s family home and other properties do not need to be sold off to raise cash, allowing her children to inherit the full value of her estate. This planning ensures that her legacy is preserved as she intended, and her heirs benefit from the maximum value of their inheritance without the pressure of raising funds quickly to meet tax obligations.

Meet Margaret, a retiree who owns a valuable family home and several investment properties. She is concerned about the potential burden of estate taxes on her heirs, which could force the sale of these properties. 

Margaret wisely secures a life insurance policy with a death benefit large enough to cover expected estate taxes and other related costs. When Margaret passes away, the proceeds from her life insurance policy are immediately available to her heirs. They use these funds to pay the estate taxes and other expenses. 

As a result, Margaret’s family home and other properties do not need to be sold off to raise cash, allowing her children to inherit the full value of her estate. This planning ensures that her legacy is preserved as she intended, and her heirs benefit from the maximum value of their inheritance without the pressure of raising funds quickly to meet tax obligations.

Conclusion 

From providing tax-free income and serving as a reliable emergency fund to protecting your estate and supporting long-term care needs, life insurance offers numerous benefits that can help secure a stable and prosperous future. As we’ve explored, incorporating life insurance into your retirement strategy not only protects your financial legacy but also enhances your ability to manage and enjoy your golden years with peace of mind. Whether you’re looking to buffer against market volatility, preserve valuable assets for your heirs, or even support a cherished charitable cause, life insurance offers solutions that can be tailored to meet a wide range of retirement needs and goals. Remember, the best way to determine how life insurance can work for you is to consult with a financial advisor who can provide personalized advice based on your unique financial situation.

Frequently asked questions (FAQs) on Ways Life Insurance Can Complement Retirement Planning

Yes, certain life insurance policies, especially those with increasing death benefits, can help protect against inflation. These policies allow the death benefit to grow over time, often linked to an inflation index or through dividends. This feature can ensure that the purchasing power of the death benefit does not erode over time.

Some life insurance policies include riders that allow policyholders to access part of the death benefit early if they require long-term care. These living benefits can be used to pay for expenses related to home care, nursing homes, or assisted living, which are often significant during retirement. This can be a crucial supplement to other retirement savings, helping to cover care costs without depleting other retirement funds.

Absolutely. Life insurance can be an effective way to leave a legacy to a charitable organization. By naming a charity as the beneficiary of a life insurance policy, you can make a significant charitable gift that might be larger than what would have been possible through your estate otherwise. This not only benefits the charity but can also provide estate tax benefits if structured properly.

For retirees who own a business, life insurance can be an essential part of succession planning. A life insurance policy can provide the funds necessary to allow a partner or successor to buy out the retiree’s interest in the business upon their passing. This ensures a smooth transition and prevents the need to liquidate other business or personal assets to cover the cost of the transfer. This strategy helps maintain the continuity of the business while securing the retiree’s family’s financial future.

Find a solution for what you’re looking for 

Life insurance in your retirement planning is a strategic move that ensures your financial goals are met and your legacy is secured. At Protect Your Wealth, we work with and compare policies and quotes from the best life insurance companies in Canada to ensure the best solution for you and your needs. We provide expert life insurance solutions, including no medical life insurance, critical illness insurance, term life insurance, and permanent life insurance to build the best package to give you the protection you need.

Contact Protect Your Wealth or call us at 1-877-654-6119 to talk to an advisor today! We’re proudly based out of Hamilton, and service clients anywhere in Ontario, British Columbia, Alberta, and Manitoba including areas such as Waterdown, Grande Prairie, Kelowna, and Brandon.

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