What comes to mind when you think of life insurance? You are likely thinking of paying final expenses and funeral costs and not what you can do with your insurance policy while you are living. A whole life insurance policy, either a universal life or participating policy, can also benefit you and your family while you are alive.
Many permanent life insurance policies have a cash value that can grow tax deferred over time, taxed only when withdrawn from the policy. Here are three things you can do with a whole life insurance policy, whether you are looking to access the values of a policy you already have or want to make a new policy part of your retirement or estate planning.
1. Supplement your retirement income
You can combine planning for your retirement income and your insurance needs with a whole life policy. In retirement you can assign the policy to a lending institution as collateral on a line of credit and withdraw values from the policy as needed. The death benefit still remains in place and upon the death of the insured any outstanding balance and interest is paid to the lender and the remaining goes to the beneficiaries.
2. Take out a loan
Access the cash values through a policy loan. Interest is then charged on the loan within the policy, but the policy cash values (and death benefit for applicable policies) continue to grow as if no money was withdrawn. The loan can be repaid at any time without penalty. If the insured dies while a policy loan is outstanding the loan and interest outstanding are taken from the death benefit and the rest is paid to the beneficiaries.
3. Help fund a child’s or grandchild’s education
If you have saving for college or university for a child or grandchild in mind, there is an opportunity for several years of tax advantaged growth in the cash value of a policy, by owning a policy where a child is the life insured. When it is time to pay for post-secondary education, ownership of the policy can be transferred to the insured and, similar to a Canadian RESP, taxes are paid at the student’s tax rate when money is withdrawn.
If the child does not want to use the money for school it can instead go to a down payment on a home, the purchase of a car, the start of a business or continue to grow untouched in the policy. Funding a policy in this way can be a tax advantaged strategy for wealth transfer whether or not there is a specific savings goal in mind, while insuring the child for the future at comparatively low premiums.