Whole life, universal life, and variable life insurance policies are known as “permanent” life insurance. Each of these types has an investment account called the cash value.
Over the years, the cash value of your policy may have accumulated to a sizable amount of money. If you want cash for your retirement, you can take tax-free withdrawals, up to the amount of the premiums you’ve paid. Subsequently, you can borrow from the cash value, tax-free.
However, if you borrow against a life insurance policy, be careful not to borrow too much. If the cash value falls below certain levels, the policy will lapse and all the untaxed investment buildup will become taxable.
Another strategy is to exchange your insurance policy for an annuity, in a tax-free transfer under Section 1035 of the tax code. Then the annuity can pay you income in retirement. By exchanging an insurance policy for an annuity, you avoid the need for paying ongoing insurance premiums.
