FREQUENTLY ASKED QUESTIONS

With life insurance, there are various ways for you to ensure that you provide for your retirement and estate. Having an individual retirement account can provide income, while a life insurance policy can increase the amount of money that you will leave to your loved ones after you pass. With certain life insurance policies, you are able to build a cash value (tax-deferred) and borrow money tax-free. With that being said, you may be wondering what happens to your cash value life insurance policy when you do not need it anymore, and what your options may be. This is where you may be wondering if you can roll over your life insurance policy into an IRA. Unfortunately, you are unable to roll your policy over directly into an IRA, but there are a variety of other options that are available for you that can be extremely beneficial to your financial retirement plans.

Rolling Over Your Life Insurance Policy to an Annuity

rollover life insurance iraYou are able to roll over your policy to an annuity contract, which is an insurance policy that serves as a long-term savings contract/plan. These form of contracts may guarantee a principal plus interest earnings or a potential for higher investments earnings through a mutual fund investment. There are no guarantees from mutual fund investments, and they may lose value over time as well. You also will pay taxes on the investment when they are taken out or withdrawn. If you are to withdrawal the sum before age 59 and a half, you will receive a penalty of 10 percent by the Internal Revenue Service (IRS). This is because these types of policies are treated similarly as a non-qualified retirement account.

Rolling Over Your Life Insurance Policy to Another Policy

Even if you believe that you do not need a life insurance death benefit, it still may be beneficial to maintain a policy. You are able to roll the cash value of your current policy into a paid-up life insurance policy. An example of this would be a single-premium policy, which is a policy that will only accept one premium payment. Once this premium payment is made, there are no more payments required. The policy generates cash value immediately, and the cash value can then grow over time. This policy functions very similarly to an annuity policy when you withdrawal or seek to receive a policy loan. This is because all investment gains will be taxed upon withdrawal. Very similarly to annuities, single-pay life contracts are not able to be withdrawn before age 59 and a half, or you will receive a 10 percent penalty fee.

Surrendering Your Life Insurance Policy

Another option would be surrendering your life insurance for the cash value. To do this, you need to contact your life insurance agent and make sure they are aware of your decision of wanting to surrender your policy. When the life insurance company gives the green light on this and you receive the cash value of the policy, you will then be required to pay taxes on all of the earnings within the policy. This sum of money is represented by the amount of money in excess of the total premiums you’ve paid into the policy. You are then able to use this money to fund an IRA. This option is by far one of the most beneficial and common.

Taking Out a Policy Loan

A component that is not well-known about certain forms of life insurance policies is that you can take a loan out against the policy. A policy loan is a loan against the cash value of your life insurance policy, which will not need to be repaid. You are able to utilize a policy loan to fund an IRA. The policy loan option is another extremely beneficial and common option that provides a substantial amount of flexibility. This is due to the fact that you do not have to pay taxes on any policy loan, as long as the policy is being maintained and remains in force. Ultimately, this option allows you to fund an IRA over time with money that is untaxed.

Conclusion

Once again, you are unable to roll over a life insurance policy into an individual retirement account, but taking advantage of these other options such as rolling over your policy, surrendering the policy, or taking out a policy loan can be just as beneficial for planning financially for your retirement. Before making any decisions pertaining to attempting to roll over your life insurance policy, you should meet/speak with a life insurance agent and receive advice about the most beneficial option for you. It is important to not make any financial decisions about your life insurance policy before speaking with an agent.