Life insurance policy loans during the pre-retirement years require careful evaluation within the context of comprehensive retirement planning. Cash value accumulated over decades provides substantial borrowing capacity, and the death benefit need may have decreased significantly.

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However, policy loans during this stage must align with overall retirement income strategies. Some advisors recommend systematic policy loans as tax-free income supplementation before Social Security and RMDs (Required Minimum Distributions) begin, allowing retirement accounts more growth time.

This sophisticated strategy requires proper policy structure and professional guidance—miscalculations can cause policy lapse and unexpected taxable events.

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For most pre-retirees, simpler approaches are preferable:

• If needing death benefit protection, maintain the policy without borrowing

• If the death benefit is no longer necessary, consider surrendering the policy for cash value to bolster retirement savings

 

Policy loans for pre-retirement expenses should be limited to true emergencies when alternatives do not exist. Although interest charges are typically lower than unsecured debt, they still represent ongoing costs during years when expense elimination should be prioritized.

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If loans exist against policies, evaluate whether continuing coverage makes sense: outstanding loans plus interest reduce the death benefit, potentially below levels necessary for intended purposes. Some pre-retirees discover that paying off policy loans and surrendering for remaining cash value provides a better financial outcome than continuing coverage with a reduced death benefit.

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Work with your financial advisors to integrate life insurance policy decisions into comprehensive retirement planning.