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If you bought a whole life insurance policy early in your working years, you could use the cash value as tax-free income during retirement.

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Will it be enough to cover your living expenses?

It probably won’t, but it can be a nice supplement to your retirement income and help you lower your tax liabilities overall.

Here’s how.

Step 1: Take your Required Minimum Distributions

First, you must take your required minimum distributions from your 401K or IRA. The IRS will require a specific amount of withdrawals, so you keep up with your tax obligations. This applies to standard 401Ks and not Roth 401Ks since taxes are already paid on Roth accounts.

Take the minimum amount required and supplement the rest with your life insurance cash value if available.

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Step 2: Take your Social Security Pay

If you are eligible for social security payments, take it and let it supplement your retirement income. SSI isn’t enough to live off of for most people, but it can be enough to supplement your retirement income.

These two steps will fill up your lowest tax brackets. So you’ve minimized your tax liabilities thus far but still have the income you need in retirement.

Step 3: Withdraw from your Life Insurance Cash Value

Cash Value

Any money you still need could come from your life insurance cash value. Every policy has a different amount you can withdraw, so always know the terms of your policy.

If you withdraw anything below your basis (aka your contributions), they are tax-free because you’ve already paid taxes on the money you contributed. Any money you withdraw beyond your basis will be taxable, so watch how much you withdraw.

How to Maximize your Cash Value

To maximize your cash value so you have plenty of money to withdraw during retirement, consider the following:

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  • Reinvest any dividends earned. Don’t withdraw dividends. Instead, reinvest them so they can make even more money, growing your cash value even further.
  • Choose your policy according to your risk tolerance. Whole life insurance offers a guaranteed rate of return. It might be lower than other more aggressive investments, but it’s guaranteed. If you want something riskier with the potential for higher returns, a universal life insurance policy offers more options with higher rewards yet more risk.
  • Buy your policy as early as possible. The younger you are when you buy a life insurance policy, the more time you have to earn a cash value. This doesn’t mean you shouldn’t take out a policy if you’re already in your senior years, but your cash value may not be as high as it could be if you bought it sooner.

Final Thoughts

Tax-free retirement income with life insurance is possible. You just have to think outside the box and plan accordingly.

Talk with your tax advisor so you’re aware of the tax liabilities, how each investment might affect them, and how to lower your tax liability to make the most out of your income in retirement.


Meet Aaron H., a senior life insurance agent from California with 15+ years of experience. With a major in finance, excellent analytical and communication skills, and a passion for helping clients find personalized solutions, Aaron is a trusted advisor in the industry. He stays up-to-date on the latest trends and developments by attending webinars and workshops, reading industry blogs, and writing informative blog posts on this website. Aaron also has a keen understanding of SEO and online marketing, which he uses to help his clients reach a wider audience and get the coverage they need. He cherishes spending quality time with his wife, two children, and elder parents.