Determining what type and amount of life insurance is right for you require some careful thought and it sometimes seems a secret decoder ring. In addition to term life, whole life, senior life insurance and universal life polices, these days, there are a number of derivative insurance products, many of which are marketed by a aggressive salespeople. These products usually are based on the three major kinds of insurance, but they are complex. They usually have been designed to fit extremely specialized situations and do not make sense for most consumers.

Life insurance and related annuity products frequently are used to provide funding for retirement plans and other types of plans, due to the tax advantages they can offer. Some of these plans also may be funded with other products, such as mutual funds, certificates of deposit, stocks and bonds, cash held in bank accounts, etc.

For example, a senior life insurance policy accumulates a sum of money for retirement while providing a death benefit. When you retire, the policy will pay you an income, such as $10 per $1,000 of the senior life insurance for your lifetime or for a specific period. Once the cash value in the policy becomes greater than the face amount, that cash amount becomes the death benefit.

When you retire, you can use a senior life insurance in several ways. You can borrow cash values or annuitize payment plans. Both methods will allow you to use money for retirement, but each has distinct pros and cons.

If you have accumulated cash value in a senior life insurance policy when you retire, you can begin withdrawing the money on a tax-free basis. On the other hand, money that you withdraw from qualified retirement plans, such as IRAS will be taxed as income.

Borrowing money allows you to avoid income taxes. This is the good news, however, if you borrow all of your cash value and the policy terminates, you will be hit with capital gains tax on any amount in excess of the premiums you paid, for money you spent years ago. That is the bad news. This kind of capital gains tax can be a nasty surprise at age 80 or 85, when most people are busy worrying about health coverage or estate taxes.

Be careful about the rate of return you assume when figuring out how much money you can take out. Overzealous agents sometimes will show illustrations that lead to a big retirement benefit. You have to remember that illustrations are based on the assumption that the company will continue to credit the cash value of the policy at a certain rate. However, many people lost a lot of money on these investments in the 1980s, when the interest rates fell and policies were not performing the way consumers expected.

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