Financial planners say rich people do 4 things to get the most out of their life insurance

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• Both whole and variable life insurance can potentially include tax benefits.
• Some life insurance policies offer long-term care riders, which can be used for retirement planning.
• In some cases, a life insurance loan can be an effective source of supplemental retirement income.

One of my biggest 2024 financial goals is to finally get a life insurance policy. But as I've been researching what policy makes the most sense for my family and future goals, I've found myself wondering how else life insurance could better my financial portfolio.

I had heard about wealthy people using their policies as a way to rack up extra income or add to their retirement benefits. In an effort to make sure I get the right plan, I asked financial advisors how to get the most out of life insurance. Here's what I learned.

1. Whole life insurance can provide tax-free dividends

When shopping around for a life insurance policy, one of the first decisions you need to make is whether you want whole or term life insurance. While there are pros and cons to both, certified financial planner Hazel Secco says that whole life insurance can provide tax-free dividends.

"While dividends are not guaranteed, policies from well-established companies often offer around 3% in tax-free dividends," she says.

For someone looking to build up wealth to cash in on during retirement, Secco says that dividends can accumulate over time and be used as a tax-free pool of money.

However, Secco says that using life insurance as a savings vehicle is a long-term strategy.

"Ideally, you should commit to this approach for at least 10 years, but preferably 15 to 20 years, to fully benefit from the compounding effect of tax-free cash value growth," she says.

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2. Variable life insurance can also have a cash value component

Secco says that variable life insurance policies can also offer a cash value component.

"If variable life insurance provides high returns over the years, it can essentially create another tax-advantaged investment account," she says. "However, it's particularly beneficial to front-load the policy, as this gives the cash value more time to grow and benefit from compounding, especially when you're younger."

She explains that as a person ages, insurance fees (like mortality and administrative charges) increase, which can diminish the compounding effect as these fees are automatically deducted from the overall cash value.

3. Long-term care riders can help with retirement planning

When deciding on a life insurance policy, Secco says that life insurance companies have been offering products with long-term care riders, which can be part of a retirement plan.

"These riders can either pay directly to a nursing home or care facility or even provide income to family members who are caring for you," she says. "This can be a creative way to enhance your income pool during retirement, especially in the later years when long-term care needs become more common and additional income is necessary."

4. Life insurance loans can be supplemental retirement income

Certified financial planner and certified public accountant David Peters explained that you can take out a life insurance loan on the cash value of your life whole life insurance policy.

"For supplemental retirement income, you can take a loan out on the cash value of your whole life insurance policy," he says. "As long as it's a loan, it will be tax-free."

However, he says that doing this decreases the death benefits of your policy for your beneficiaries.

"While it is tax-free income, it does have the catch that it's a loan that will be taken out of your death benefits, plus any interest that might have occurred, when you do pass away," he explains.