If you have a need for supplemental income in retirement, beyond those accounts on which you’ve always planned on relying, there are other places you can turn. Non-traditional sources of retirement income can include life insurance and the equity in your home.
If you currently own, or are considering purchasing life insurance, you may be able to utilize these products as a source of supplemental income in retirement. In addition to their death benefits, permanent life insurance can provide valuable ‘living benefits’, as the cash value within these policies has the potential to accumulate. Owners can access their cash values policies through tax-free low cost loans or partial withdrawals subject to certain limitations, providing an added income option to supplement retirement income needs or other planning challenges.
Please note that partial withdrawals or outstanding loans and loan interest will reduce the policy’s death benefit and may have tax consequences. If the policy is classified as a Modified Endowment Contract (MEC) under IRS rules, distributions are generally subject to income taxes and, if before age 59½, a federal tax penalty. Taxes may be incurred if the policy is allowed to lapse before maturity.
Your Home’s Equity
One source of emergency funds could be right over your head. If you own your home and have adequate equity available, it could be tapped for larger cash needs in an emergency situation. The first option is for retirees that may or may not have a mortgage on their home. If you don’t, taking out a mortgage or refinancing your current mortgage with a low fixed rate could allow you to withdraw a large amount of cash to use for extenuating circumstances. However, you will be responsible for paying it back on a monthly basis. But the interest charged is often tax deductible. The less complex option is to open a home equity line of credit on your home. This option gives you a low to no closing cost option and check writing access to directly pay your expenses.
Please review these options carefully with your financial and tax advisors because without adequate income in retirement to pay back loans or make mortgage payments, life insurance and/or one's home could be jeopardized.