The Overlooked Financial Tool That’s Helping Me Retire Early
October 11, 2021
By Stephanie Evans
I was 40 years old when my dad died in 2013. The experience forever changed the way I look at my own future.
Above all, of course, I grieved the loss of my hero, my rock, my irreplaceable guide. His death prompted a lot of reflection—about how he lived his life and how I was living mine. Then there were the practicalities: making arrangements, paying medical, funeral, and burial costs, and ensuring that my mother—suddenly a widow—had sufficient resources to continue to live comfortably.
I came away from all this with two firm resolutions. First, having witnessed how my father’s life insurance policy helped my family cover the expenses of his death and give my mom a nice financial cushion, I was determined to have enough coverage to do the same for my husband in case something happened to me. Second, before any such untimely end came, I vowed to live my life to the fullest. That meant concentrating on my goal to retire at 55.
One product, two purposes.
Not long after the funeral, I visited my financial advisor and laid out these goals. That’s when he asked if I had ever considered taking out a permanent life insurance policy. Perhaps, he suggested, it might offer a way to help me meet both my objectives.
Like all life insurance, permanent policies provide a payout to your family when you die. But unlike a term policy, permanent policies have a component, called the “cash value” or the “account value.” Essentially, you pay a monthly premium, part of which goes toward the insurance and part of which goes into the account value. This can grow tax-deferred, and over the years may potentially grow to serve as a nest egg you can use however you see fit. Types of permanent insurance include universal life and whole life.
A universal life policy appealed to me. At the time, I had life insurance coverage through my job as well as a small life insurance policy I bought on my own. It was enough to cover my funeral and burial costs but not much else. Without my income, my husband would be unable to pay our mortgage. We don’t have children, but at the time we’d been discussing the possibility. The universal life policy I was considering paid out a death benefit of $1 million, which would provide more than adequate security for my husband in the event of my death.
But my particular financial situation was another reason I found universal life attractive. I’ve been fortunate to work for a company for more than 20 years that has both a generous pension and a retirement plan for its employees. The stumbling block for me was that I hoped to retire at 55, and the pension and retirement benefits don’t kick in until I turn 59 1/2. I needed a stopgap for those years in between retiring and being able to withdraw from those benefits. That’s where the universal life policy I ended up buying may come in handy.
The right fit for the life I want.
Universal life insurance isn’t for everyone. When my financial advisor proposed it, I read several articles that warned that it takes time for the policy’s cash value to grow large enough to be used as an income stream. Indeed, in my case, it has required some patience. But now, seven years after buying the policy, I see that it’s a good fit for me and my needs. Right now I’m on track to retire at 57 or 58. My plan is to use the cash value to create an income stream when I retire.
At that time, I should have sufficient cash value to withdraw funds out of the policy’s cash value up to my “basis,” or the amount of money I’ve paid in via premiums. Though withdrawals of interest credited to the policy’s cash value are taxable, withdrawals up to my basis are tax-free. I will also have the option to take out a loan on the policy’s cash value, either as a lump sum or a series of withdrawals. Interest rates on these types of loans may be lower than what I can get from a bank. The loan is tax-free, and I won’t even necessarily have to pay back the principal, just the interest on the unpaid balance. Meanwhile, I will continue to earn interest on the policy’s full cash value. All I have to do is make sure my outstanding loan and interest don’t exceed that cash value, or the policy might lapse. And I have to remember that any unpaid balance at the time of my death will be deducted from the death benefit.
I should be secure enough to leap into a retirement with plenty of travel with my husband. I plan to take my mom on some of those trips. She hasn’t traveled much since dad died, and there’s no one I’d rather see the world with.
I grieved the loss of my hero, my rock, my irreplaceable guide. His death prompted a lot of reflection—about how he lived his life and how I was living mine. Then there were the practicalities: making...
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