Using a life insurance policy to supplement retirement income
A policy you bought decades ago may be worth more as a lump sum today than as a death benefit you may never need.
Many people reach retirement with a life insurance policy that made sense when they bought it but no longer fits their situation. The children are grown, the mortgage is paid, and the original reason for the coverage has passed. Meanwhile, the policy has been accumulating value — value that can be unlocked through a life settlement.
Why life insurance and retirement planning intersect
Permanent life insurance policies — whole life, universal life, indexed universal life — build cash value over time. That cash value belongs to the policyholder and can be accessed through loans, withdrawals, or surrender. But the cash surrender value is only one measure of what the policy is worth. The secondary market may pay significantly more, because buyers are pricing the death benefit, not just the internal account value.
What a life settlement adds to the picture
A life settlement converts the policy into a lump sum that can be invested, used to fund long-term care, pay off debt, or simply provide financial flexibility in retirement. The proceeds are typically several times the cash surrender value. The trade-off is that the death benefit goes to the buyer, not your beneficiaries — which is why this option makes most sense when the coverage is no longer needed for its original purpose.
Tax considerations
Life settlement proceeds are not entirely tax-free. The portion of the proceeds above your cost basis (premiums paid minus dividends received) is taxable. The portion above the cash surrender value is taxed as ordinary income. The portion up to the cash surrender value is taxed as capital gain. Your tax advisor can calculate the specific impact for your policy. For many policyholders, the after-tax proceeds from a life settlement still substantially exceed what a surrender would return.
Timing
The value of a policy in the secondary market generally increases with the insured's age and any changes in health. A policy that does not qualify today may qualify in a few years. Conversely, a policy that qualifies now may not qualify later if the insurance company changes its terms or the policy lapses due to unpaid premiums. If you are considering this option, the time to find out is before the policy becomes a problem, not after.
The policy may be an asset you have not fully accounted for.
Find out what it is worth before you make decisions about your retirement income plan.
Find out what your policy is worth.
One short conversation tells you whether it qualifies and what the realistic range of proceeds looks like.