The Retirement Strategy Many People Overlook—But Could Supercharge Your Savings

Stephen J. Bronner

Stephen J. Bronner is a freelance journalist and public relations consultant. Over his more than a decade in the field, he has written articles and guides on retirement, personal finance, mortgages, real estate, and investments.

Published May 28, 2025

Illustration showing a person sitting on stacked coins under a large umbrella held by a hand.

Living comfortably during your golden years heavily depends on your ability to set up sources of retirement income that will augment modest Social Security payouts. Establishing retirement funds such as a 401(k) or Roth IRA is a common way people fund their retirements, but there’s another mechanism to boost retirement income while offering the benefit of a payout to your loved ones in the case of your death: life insurance.

Key Takeaways

Certain life insurance policies can be used to supplement retirement income through cash value withdrawals or loans.
Whole life and universal life insurance offer tax-deferred growth and potential tax-free income if managed correctly.
These policies can help diversify a retirement portfolio because they’re not directly tied to market volatility.
Death benefits provide added financial security for your beneficiaries, even if the policy is used for retirement income.

Indeed, certain life insurance plans can provide a supplemental source of retirement funds that bypass taxes (as long as you follow the rules) while making your portfolio less dependent on the markets, providing financial security in the face of unexpected situations. You can borrow against your balance, typically at lower rates than other types of loans.

Types of Policies That Provide Additional Income in Retirement

Term Life Insurance

If you need a life insurance policy that will provide supplemental retirement income, term life insurance is not what you’re looking for. Rather, term life insurance strictly provides the basic protection of death benefits in the case of your passing.

Term life is popular with buyers who are looking to save money. These plans are lower-cost and provide coverage for a set period, typically terms of 10, 20, or 30 years.

Note: The affordability comes in through the fact that premiums remain the same throughout the length of the policy. If you die, your designated beneficiary (or beneficiaries) receive the death benefit.

“Think of term insurance like paying your car insurance,” said Steven Conners, founder and president of Conners Wealth Management in Scottsdale, Ariz. “As you pay, you’re covered. Should you stop paying your premium, you do not have insurance then.”

He added, “You don’t want to think about [term life] for retirement. It’s just the lowest cost if that’s what you can afford and you need the coverage.”

Conners went on to say that term life may be more for peace of mind rather than financial security. According to his own studies, people typically outlive their term life insurance policies, with only 2% to 3% of death benefits being paid out.

Whole Life Insurance

As its name suggests, whole life insurance policies will stick it out with you to the end. Not only do they provide a death benefit in the case of your passing, but they also accrue value the more you pay into them.

Whole life polices accumulate cash value–typically, tax-deferred–no matter which way the market is trending.

Speaking of those payments, how much you’ll pay depends on your coverage amount—basically, how much will be paid out when you die—your age and your health. Health factors include any recurring conditions and whether you smoke. Once the insurance company calculates your premiums, your payments, whether monthly or annually, will remain the same.

Whole life insurance policies can enhance retirement income because many of them pay out dividends—as long as they are participating whole life plans. When the company is doing well financially, a company will issue its policyholders a dividend, which Conners said could provide an internal rate of return of around 5%, depending on the policy.

The cash value of the policy will not provide significant income until after the cash value has built up. This usually takes several years of premium payments, according to Northwestern Mutual. Policyholders can withdraw or take a loan against their policy, which reduces its cash value as well as the death benefit.

For these reasons, Conners said that whole life insurance policies are a popular investment vehicle on behalf of children, who pay low premiums and are easily approved (as long as they don’t have any major health conditions).

“It doesn’t move, they’re constant, and the cash value keeps growing,” Conners said of these policies.

Ways Life Insurance Can Enhance Your Retirement Income

Supplemental Income

Along with more traditional retirement income sources such as a 401(k), Roth IRA, pension, and/or Social Security, holders of certain life insurance policies can use the balances of their accounts as a supplemental source of retirement income.

In the case of a whole life insurance policy, the growth of your balance comes in the form of dividend payments. With a universal life policy, the growth comes from interest or returns from the indexes the policy is invested in.

Unlike those other sources of retirement income, life insurance policies are not directly impacted by the stock market. As long as you’re keeping up with your contributions, you can expect a nice chunk of change to be available to you to spend how you wish during your golden years.

Fast Fact

Depending on the policy, any withdrawals or loans will reduce the amount of funds available to your beneficiary or beneficiaries after you die.

Tax-Deferred Growth

There are a handful of investments whose gains are not subject to taxes. These include 529 plans for children, Roth IRAs, certain bonds, and arguably the employer-matched funds of a 401(k) account. According to Craig Ferrantino, founder and principal of Craig James Financial Services in Melville, NY, investment-grade life insurance also falls into this category.

“There’s very few in that tax-free category, so we like it in our toolbox,” he said.

Again, withdrawing from a life insurance policy will be tax-free as long as the policy is in effect and you stay within the limits allowed by the government (known as the modified endowment contract).

Financial Security

Financial advisors, including Ferrantino, recommend life insurance policies such as whole life insurance because, compared to other investments, insurance companies are relatively stable. First off, most are private companies, meaning they’re not subject to the whims of the market or profit-hungry shareholders. They’re also rated by outside agencies such as Fitch, Moody’s, or AM Best, who evaluate whether they have cash on hand to cover all their expenses. Financial advisors recommend sticking with the A-rated companies.

“We don’t see a lot of insurance companies going out of business, either to get sold or something,” he said. “It’s very unlikely that they’re going to fold. So you are going to keep continuing to get your benefits.”

These policies also provide financial security because of their death benefits, Conners said. Even if you have liabilities before your passing, you can feel secure knowing that your family members won’t be burdened by them because of the death benefit payout.

Portfolio Diversification

All savvy investors know not to put all their eggs in one basket. Holding too many assets in one category—such as energy, tech, or retail—can leave your portfolio in the red since these assets in the same category tend to move in the same direction together. When you hold a whole life insurance policy that pays out dividends, it’s mostly segregated from market forces. Universal life policies are more tied to the markets, but many plans protect policyholders from losses.

“It’s a non-correlated asset, so if the stock market crashes, so what?” Conners said. “The worst return you could ever get in an index universal life policy is no credit that year.” It’s worth noting that policy fees still apply even in zero-return years.

Longevity Protection

With any retirement account, there’s always the danger of you outliving your benefits. As lifespans have increased, there’s a danger of using up all your retirement funds. Having a life insurance policy as an additional source of retirement income could alleviate those concerns.

“It’ll give you a guaranteed payment or add to your pension every year for as long as you live. That’s longevity protection,” Ferrantino said. “If you don’t live so long, then it’s nice to know you won’t run out of money.”

Conners added that many of the retired clients he works with who find themselves in the ideal situation of having little debt feel safe knowing they have this additional account to tap into that doesn’t carry the same risks of taxation that other retirement accounts can carry.

1035 Exchange

If you find yourself in a situation in which your life insurance policy won’t be as beneficial to you as you had initially expected, the IRS allows you to move the cash value of the policy to something similar, without tax consequences.

According to the IRS, “1035 provides non-recognition treatment for taxpayers who have ‘merely exchanged an [annuity contract] for another better suited to their needs and who have not actually realized gain. …The contracts exchanged must relate to the same insured, and the obligee or obligees under the contract received in the exchange must be the same as those under the original contract.”

How Do You Calculate Retirement Income?

Many of the major retirement account providers have calculators that can be used to approximate how much income you’ll have during retirement. For a more extensive calculation, engage the services of a financial advisor, who will create a more complete picture of your retirement based on your assets and liabilities.

What Is the Best Source of Income in Retirement?

“The best source of income is one that continues for life,” Conners said. “This may be a pension from your former employer. It can also be an individual retirement plan (IRA) that you have been paying for many years. The main source should be preferably a guaranteed amount that you can realistically count on through thick and thin.”

What Is the Best Investment for Retirement Income?

There likely isn’t a “best investment.” Ideally, your retirement income will come from a variety of sources, including retirement accounts and a life insurance policy.

The Bottom Line

Those looking to diversify their retirement income should consider a life insurance policy. Not only do these policies provide peace of mind due to the death benefit they bestow to your beneficiary, but they’re also a way to earn extra income, either through dividends with a whole life policy or interest payments through a universal life policy.

Five Smart Ways to Use Your Life Insurance While You’re Still Alive

Life insurance can do more than just provide for your heirs — here’s how to maximize your policy while you’re still here.

When you purchase through links on our site, we may earn an affiliate commission. Here’s how it works.

Laura Gariepy

published 15 May 2025

When you initially applied for life insurance, you probably intended for the coverage to serve as a safety net for your family or a legacy for your beneficiaries. Life insurance’s primary purpose is to provide a monetary benefit to your heirs upon your death.

However, your life insurance policy can serve you in several ways while you’re still alive. Whether you’re looking to cover unexpected expenses, supplement your income or access funds in a financial pinch, there are options to consider.

We’ll discuss those options and their potential consequences. That way, you can decide if leveraging your coverage before death is a wise move for you and your loved ones.

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What is cash value in life insurance?

The first three options presented in this article involve tapping the cash value of a permanent life insurance policy (coverage that lasts for your entire lifetime as long as you keep up with premium payments). Therefore, it’s helpful for you to understand what cash value is and how it works.

Permanent life insurance policies have two main components — the death benefit and the cash value account. The death benefit, or face value of your policy, is the amount of money your beneficiaries will receive when you die.

Your cash value account contains a portion of the premiums you’ve paid since obtaining coverage, plus interest paid by your insurer. Over time (often many years), your cash value balance can grow to a significant sum.

You can leave the money alone indefinitely. If there’s cash in the account when you die, the insurance company will absorb it. The funds are not distributed to your heirs. They will only get the death benefit.

You can also choose to tap into it in various ways (discussed below) during your lifetime. Doing so could help you financially in the short term. However, your decision can also reduce your death benefit or put your policy at risk.

Five ways to tap into your life insurance now

A couple is going over their life insurance policy with their insurance agent.

Depending on your policy type, you may be able to access funds, cover expenses or even supplement your retirement income. The following are five smart ways to leverage your life insurance now.

1. Pay your premiums

If you have enough cash value built up, you can use it to pay your premiums, freeing up money in your budget for other purposes. However, you must keep track of your cash value account balance.

If you deplete your cash value account and don’t resume making your scheduled premium payments, your policy could lapse.

2. Take out a loan

You can also borrow against your life insurance and use your cash value to cover an expense you may not otherwise be able to afford. Some retirees take out a cash value loan from their policy to supplement their retirement savings or avoid cashing out other high-performing investments.

This strategy has two benefits: A cash value loan will generally have a lower interest rate than a traditional loan, and you can usually receive loan funds tax-free. However, your heirs will receive a reduced death benefit if you don’t repay the debt.

3. Surrender your policy

You can surrender your policy if you no longer need or want your life insurance coverage or can’t afford your premiums. Doing so will trigger a withdrawal of your cash value.

Your life insurance will be canceled, so you won’t have to make any more premium payments. However, your heirs won’t get anything when you die, so you should think carefully before going this route.

4. Use your living benefit rider

The living benefit rider is an optional addendum to your permanent or term life insurance policy, which provides coverage for a specified number of years. If you become terminally ill (typically with a prognosis of a year or less), you can receive a percentage of your death benefit in advance to pay for medical care and related expenses.

You may have to pay a fee to use this rider, and the amount you receive will reduce the payout to your beneficiaries upon your death. However, exercising this option could help prevent you and your family from having to liquidate other assets to pay for your treatment.

5. Sell it

If you’re a retiree who no longer needs life insurance or you’re desperate for money and can’t afford your premiums, you can sell your permanent or term life insurance policy. Selling your policy is sometimes referred to as a life settlement or viatical settlement.

A third party buys your coverage, takes over the premium payments and gets the death benefit when you die. You may not get as much as you expect from the transaction because:

You won’t get the full face value of your policy.
You’ll likely pay high broker fees.
You’ll have to pay taxes on the sale proceeds.

Since selling your policy means sacrificing a large percentage of your death benefit and not leaving the funds to your heirs, you should ensure this is what you need or want to do before initiating a sale.

What to do before using your life insurance while you’re alive

Here are a few steps you should take before using your life insurance before death:

Make sure that using your life insurance in advance is necessary. Have you explored alternative solutions? For instance, getting a credit card with a 0% introductory annual percentage rate (APR) could be a better way to cover an expense than borrowing from your policy’s cash value.
Review your coverage details and your insurer’s rules. For instance, does your policy have a living benefit rider, and if so, how much of your death benefit can you get ahead of time? Or, what’s the interest rate on cash value loans?
Ask for guidance if necessary. If you need more information or want to explore your options, reach out to your agent, insurer, or other trusted financial professional.

What to do after using your life insurance while you’re alive

Once you’ve used your life insurance benefits before death, there are a few things you should do, such as:

Borrowing from or withdrawing your policy’s cash value can have serious financial consequences, so be sure to make the most of the funds you get.
Repay the loan (if possible). Dying with an unpaid life insurance loan means your heirs will get less money.
Strengthen your finances to avoid future loans (if possible). Try to build cash reserves separate from your life insurance policy. That way, you can leave your death benefit intact.
Keep tabs on your cash value balance. As a best practice, conservatively estimate how many months of premiums your cash value will cover and put a reminder on your calendar to resume payments before then. Remember, if you exhaust the funds, your policy could lapse.

Explore some of today’s best life insurance options with the tool below, in partnership with Bankrate: