Should You Buy Permanent or Term Life Insurance?

2. Get ongoing retirement income

Some whole life policies allow you to receive a regular payment rather than taking a lump-sum distribution. That steady stream of cash could supplement your Social Security benefit or other retirement income, and it’s generally tax-free, provided the amount of funds you receive do not exceed the premiums you’ve paid for the policy.

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Beware of two caveats, though. First, under IRS rules, not every permanent life insurance policy can provide this ongoing income option. “It matters how the policy is structured,” Monahan says. Ask your agent if a policy you are considering or already own qualifies.

Second, the payments you receive over time come out of the death benefit. Say you have a $500,000 whole life policy, and your daughter is the sole beneficiary. Then assume you convert a portion of the death benefit into a $1,000 monthly payout for yourself. If you did that for 10 years before dying, you would have tapped into $120,000 worth of your policy’s cash value, and your daughter would receive $380,000.

3. Cover costs of long-term or critical care

“A common misconception is that insurance policies are just like they’ve always been,” Monahan says. “But there’s actually been a ton of change in the industry. Hybrid life insurance that can also pay for long-term care — those are relatively new products.”

Hybrid policies, a form of permanent life insurance, allow policyholders to convert their cash value to use in paying for nursing home care or skilled nursing in your home. That can help you address a major financial gap many retirees face.

According to insurance provider Genworth, which tracks long-term care expenses, the median annual cost of living in a nursing home in 2021 was $94,900 for a semiprivate room and $108,405 for a private room. By 2030, the company forecasts, those costs will rise to $123,823 and $141,444, respectively.

About half of nursing home residents are there for at least a year, and more than 1 in 5 stay for nearly five years, according to the Health in Aging Foundation.

You could also buy a permanent life policy with an accelerated death benefit rider. With this provision, you can tap into the death benefit “to pay for any terminal, critical or chronic life event,” says Rex Jackson, an accredited investment fiduciary and founder of IE Invests in Redlands, California.


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