Use Cash Value Life Insurance to Create Retirement Income

Many of the people who reach out to us hope to use cash value life insurance to create retirement income. They’ve heard about this possibility, maybe read a book or two that talked about it, and, in some cases, even talked to a “certified” advisor.

But, they’re still scratching their heads as to how it all works, and they’re often convinced they haven’t seen the best representation of the strategy.

In the last few years particularly, this strategy has gained significant momentum, and it’s not surprising with the sagging long-term rates of fixed income investment vehicles (treasury bonds, corporate bonds, and CDs) and the volatility of the stock market since 2008.

Perhaps due to this last market collapse, a great number of people have come to the realization that they might not want to go “all-in.” They’re thinking twice about having their retirement savings tied up in the market without a safety net.

I was blind, but now I see

Now, we’ve been advocating this strategy since way before 2008.

As a matter of fact, I first presented this idea to a client of mine back in 2000, and I wasn’t the first by any stretch of the imagination.It may come as no great surprise that my first attempts to discuss the idea fell on deaf ears.

However, it’s great that more people are now able to appreciate the potential of using cash value life insurance to create retirement income.

In this post, we’ll take another look at an illustration that’s been getting our attention recently.

This proposal is really interesting in that it shows actual data from a life insurance illustration, the projected values, and, if we backtested the policy values, how it would have actually performed over the last few decades.

First, I should say that this is only one particular case. The individual in this illustration is a 37-year-old male with great health, thus garnering a preferred plus rating on the policy.

We’re assuming that the policy is funded with $30,000 in year one (due to a 1035 exchange) and then roughly $22,000 each year until he reaches age 65. I won’t go into the nitty gritty details right now, but if you want to see all those numbers, feel free to contact us, and we’ll be happy to share them with you.

However, I want to discuss one very important aspect of the policy we evaluated.

I should start by telling you that this an indexed universal life policy with a 2.0% minimum crediting rate and a 12% ceiling (or cap, if you prefer). And, this particular contract is tied to the S&P 500 Index.

What does all that mean?

It means that the credited interest in the policy is tied to the return of the S&P 500 for the given contract year with a cap of 12%. It also means that, in any year where the market return is negative or flat, the worst you can be credited is 2%.

Now, in the illustration, you are allowed to project a rate that the policy might earn throughout a person’s life. We typically don’t illustrate anything higher than 6%.

But wait, I just told you that you could do as well as 12%…right?

Yes, that’s true; however, we always believe it’s better to plan on an average much lower when we’re trying to target the use of cash value life insurance to generate retirement income.

We like to plan conservatively because the only variable in the retirement savings game that’s under your control is the amount of money you’re willing to commit during the funding period. No one can know what the exact rate of return will be over 20 or 30 years.

So, the best we can do is try to conservatively project what MIGHT happen based on historical averages. If your contract performs better, you’ll be happy. Allow me to demonstrate.

Show me the money

This a snapshot of the “back-tested” illustration. It assumes that this hypothetical guy bought this exact policy back in 1972 when he was 38 years old. Using our 6% illustrated rate, the software told us that his maximum withdrawal from age 66-100 would be $93,336 per year.

If we look at the actual results below, we’ll see something amazing.

Click on the Image to Enlarge


cash value life insurance to create retirement income1.  Notice that in 2000, when our client is 66, he begins his withdrawal of $93,336 as planned, but instead of the $1,458,000 of cash value he was projected to have, he actually had $2,347,913 at the beginning of the year.

2.  Notice the S&P returned -10.14 for his first year of taking income and -13.04 the second year. Even though he started withdrawing income at the worst possible time (remember the market in 2000-2001) his net rate of return was still positive both of those years with 1.87% and 1.64% respectively.

This is exciting! Well, it is for nerds like us, anyway. It means that even in “bad boy” years (negative years in the market), as some of our colleagues refer to them, an indexed universal life insurance policy can still deliver a positive net return after accounting for loan interest and internal expenses.

Now, mind you, not all policies would be able to do this, but this one will, and we know of at least one other one that could pull it off.

3.   The $93,336 he receives in loan that proceeds from his policy every year from age 66-100 is taken without any tax implications.

4.  Fast-forward to the end of 2011 (the last full year we have complete data). Our client has withdrawn a total of $1,120,032 in tax-free income.  He still has a death benefit of $3.4 million and can safely continue his withdrawals for retirement income. Keep in mind that his total cost basis in the policy from age 38-65 was $643,471.


Yeah, I know. That’s the sort of reaction a lot of people have the first time we show them something like this.

Most of the time, they’ve already purchased cash value life insurance from another source that sang the praises of the products, the retirement income benefits, etc.

Unfortunately, the agent then proceeded to design the policy in such a way that maximized his or her commission rather than maximizing the retirement income benefit to the client. That’s why so many people are convinced this doesn’t work, and that’s sad.

If you’re interested in learning more about how to use cash value life insurance to create retirement income, contact us to find out if it might work for you.

19 thoughts on “Use Cash Value Life Insurance to Create Retirement Income”

  1. I am a 40 yr old consumer who is trying to weigh the risks/benefits of using a “blended” par dividend-paying whole life product (and using the IBC concept) vs. using a maximally funded IUL product to stash some money in over the next 20-30 years. I am envisioning using some of the “living benefits” of the policies along the way in the form of policy loans that I pay back (for things like car purchases and college tuition, but also as a source of funding some other investments like real estate), but ultimately using the policy to provide a retirement income stream. My first impression from reading through some of your posts was that you preferred whole life, but now I’m not so sure. Maybe this is too simple a question for a blanket answer where it probably depends on the particular situation, but which product/structure do you generally recommend and why? Forgive me if my question seems naive, it’s only because, well, I am naive and have just begun learning about this insurance stuff.
    Thanks, I am enjoying your blog.

    • Hi Don–thanks for reading our blog, it’s always great to get positive feedback from our community!

      Using the living benefits of cash value life insurance a la the IBC concept is certainly a strategy that has merit. Obviously, Nash favors the use of participating whole life as the vehicle of choice for the fulfillment of the concept and he makes the case for all the reasons why. As for whether it’s better to use IUL or par whole life for the execution of such a strategy is really a matter of objectively evaluating the data generated in the product illustrations.

      Now, it’s important to note that many agents will always declare that IUL is better as a cash accumulation/distribution product, however, these are usually the same people that illustrate the product using an assumed 8% interest rate…which is ridiculous in our opinion. We don’t illustrate anything over 6% as we feel that’s more in line with what the product may actually return over time. By using that assumption, we are able to make a more apples to apples comparison to par whole life.

      I can honestly say that we are rarely able to predict which product will work better. Our process is one that takes a significant amount of time, involves much discussion between Brandon and myself, and has a whole lot of tweaking at its core. We run the numbers and see what the output tells us. Sometimes whole life comes out on top and sometimes IUL is the clear winner.

      Each situation is different and depends very much on the health of the insured, the age of the insured, and the amount of money they are willing to allocate toward funding. Believe it or not some products do not perform in a linear fashion. That is to say, just because one company’s product wins at $5,000 of premium doesn’t mean that company looks the best at $50,000 of premium. These are little nuances that aren’t evident without our analysis.

      I hope that helps…please let me know if there’s something else I can add to this.

  2. So which contract was used for this illustration; and what is the other contract you know of that produces similar results?

    Looking forward to the changes you mentioned in this weeks news summary.

    You’ve mentioned in a few places about the use of Life for asset building for high net worth, corp C-suite types, anything unusual in plan structure in those cases?

    Thank you gentlemen for all the great learning.


  3. I redid the calculation. If you had invested in the S&P, going through the same motion. You would have ended with $5,976,641.43 at the end of 2011. IUL seems to undercutting the performance by a lot!.

    • Hi George,

      How does one “invest in the S&P?”

      Further, if you want to be taken seriously, we’ll need your methodology.

      • I’m going to piggy back off George’s comment. I plugged the following columns from your illustration into an excel: year, contribution/withdrawal, S&P 500 Indexed Annual Return. I then added a column that, for each year, added the contribution/withdrawal to the previous balance and multiplied that result by 1 + the S&P 500 return. In other words, the contribution/withdrawal was assumed to be made at the beginning of the year to get the full index return.

        In 1999, the last year of contributions, the end balance using that strategy came to $5,598,381. This is compared to the $2,347,913 net policy value of the IUL policy.

        In 2011, after 12 years of withdrawals, the balance came to $3,599,105 (through some pretty bad market years). This is compared to the $3,188,566 net policy value of the IUL policy.

        Considering that implementing this strategy would be as simple as using a low-cost S&P 500 index fund, could you explain why the IUL policy is superior? And could you also explain why you left these numbers out of the illustration? It seems to me like they are quite relevant.

        Thank you. I’m looking forward to your response.

        • Matt,

          First, I’m not aware of an absolute declaration that this strategy is superior. In fact I think we’ve been pretty clear on numerous occasions that life insurance is a low risk asset and as such should not have an anticipated rate of return similar to stocks. I.e. E(stocks) > E(cash value life insurance)

          Further we didn’t talk about investment returns in the S&P500 because this was never intended to be a one vs. the other sort of discussion.

          But since you appear to be interested in that discussion…

          First, your methodology here is flawed. You can’t juxtapose index funds with S&P returns and make inferences about returns about indexed funds. It’s a foolish mistake at best and hugely dishonest at worst. Why? Because index funds tend to lag the S&P’s performance. The amount is generally not by a large margin, but lagging is still important. Take Vanguard’s S&P index fund for example (VFINX). It’s a super star among index fund advocates. And since inception, it has lagged the S&P500 by a little over 6%. Seems insignificant, and in many respects we could make that argument and be relatively correct. But if we go back and adjust your numbers for this difference, we lose a little over $200,000 by the end of 2011 (all I did was very broadly interpolate and adjusted end values by our known coefficient). None of this accounts for the fees charged for the index fund (small indeed, but not inconsequential).

          Let us not also forget that the life insurance numbers in this example are based on current market conditions (primarily effected by fixed assets that insurers use to predict cash flows). If you truly believe the economy and market conditions will improve, than you must also accept the notion that yields on insurance products will also improve (e.g. caps could rise making the product shown in this post perform better).

          So is it really that much better? I don’t know. You don’t know. No one knows. because there is no right or wrong answer and pretending like there is makes no sense. It’s an option. We’ve come to the conclusion that based on numerous other benefits cash value life insurance brings to the table, there’s certainly good reason to consider it.

          It won’t cure cancer, balance the budget, or magically ameliorate every other problem known to the world. It’s just incredibly reliable and yields pretty well when designed and implemented correctly.

          There are plenty of circumstances that may make people opt for other choices. Doesn’t make them wrong nor does it invalidate cash value life insurance as a viable option. Just means that person chose a different route to grandma’s house.

          • Thanks for the detailed response.

            You are correct that you did not make any direct statement of the superiority of this strategy. But in my reading of the article that is inferred from statements like “this is exciting!” and “speechless”. The implication there seems to be that the customer is receiving something for nothing, when in fact, as you say, they are at best simply seeing the results of a lower-risk investment providing lower returns. It is for that reason that I think the comparison would be useful. It would bring to light the fact that they are not really seeing anything all that special. Simply a validation of the tradeoff between risk and return.

            Now, let’s talk about the comparisons. You are of course correct that getting into the nitty gritty would show that an index fund, even one as good as Vanguard’s, will lack the index. That will create performance that is slightly subpar. HOWEVER, what you have not mentioned to this point is that the S&P 500 returns illustrated in this example do not include dividends, which of course the index fund would. As a quick example, your illustrate 2010 return for the S&P 500 is 12.78% while the VFINX fund you mention actually returned 14.91%. That kind of difference is consistent year over year and will make a HUGE difference in the investor’s end value. If I use your numbers through 1976 and then use VFINX annual returns starting in 1977 (the first year of data), I actually get to 1999 with over $10 million and finish 2011 with over $9 million, 3 times more than what the IUL policy leaves you. Again, I think this sort of information is helpful so that the reader is not misled into thinking the IUL is providing more value than it really is.

            Another interesting comparison one could make is the IUL’s performance in the withdrawal period against a plain vanilla bond fund like VBMFX. If we start in 1999 with the $2,347,913 that the IUL policy leaves us with, using VBMFX for the withdrawal period would end with almost the exact same balance at the end of 2011 as IUL policy ($3,190,831). Again, I think this kind of information is helpful to illustrate where the IUL policy is falling on the risk-return spectrum.

            The implication in the article is that this product is doing something special when I think the evidence shows that it in fact is not. If anything, from a theoretical standpoint it would seem like this kind of product should actually provide poorer risk-adjusted investment returns than either of the index funds mentioned above given the expenses and insurance associated with it. That doesn’t make it a bad product, I just think it’s important information when considering it from an investment perspective.

            You also mention that market conditions could change and that the return cap on the policy could therefore rise. If the policy does indeed allow for that possibility, then is it also true that the return floor could drop? And if those things can change based on market conditions, then how relevant is it to run a backtest using the current market rates over historical market returns? These are the kinds of questions I would want to know the answers to in addition to seeing a rosy illustration.

            I do agree with you that this product will work for some people in some circumstances. I would simply prefer to see a more balanced discussion where the downsides of a product are mentioned as well, or at least mentioned that they exist, so that the consumer could make a more informed decision.

          • Matt,

            Sorry, but you’ve grossly mis-interpreted intention here. What you have to understand is that we deal–on a daily basis–with agents who want to sing praises for cash value life insurance vis-à-vis its asset building potential, but then approach the implementation process with products that were never intended to accomplish this goal, or with a design that is not intended to accomplish this goal. Our point was to shine a light on what is possible when you do it correctly. Our secondary objective was to point out that our well known practice of assuming a 6% rate of return places us with projections that under-perform historical conditions as this result beats the cash and death benefit numbers in all years vs. our plain 6% assumed constant. Our tertiary objective was to silence those who shrill about the negative consequences of taking an indexed policy loan in negative S&P years. That was it. The amazing and speechless part was that we’re correct it works, and it works better than we typically depict it if you believe history will repeat itself.

            Keep in mind as well that a lot of our discussions with people are focused not on if, but how. They’ve already decided they want it; they come to us to figure out how to do it. And this piece, as I’ve mentioned, was more focused on this stage in the process. In other words, you’re quibbling with the wrong stage in the game.

            No one is confusing the S&P price return to the total return. We’ve been explicit elsewhere about this. And, again, because this article had no intentions of making a comparison between life insurance and equity investing it made no sense to bring that topic up.

            While I could attempt to address your additional comments about a now bond fund comparison, let me extend a courtesy to you and not automatically assume I know what you’re thinking or what your intentions are by asking you a question. Since you find this all so very interesting, and because you’ve stated it’s in the name of looking at where indexed universal life insurance (in this case) falls on the risk/return spectrum, now that we’ve seen the number, what is your interpretation?

            Regarding your question about policy changes in improving markets. No, in the case of this specific product, the floor can not be reduced–nor can the participation rate of the indexing. Looking at performance through a historical lens accomplishes the same thing we’d do with any financial product. We look at it conceptually using what would have happened historically to evaluate performance under those conditions as a means to gauge how the product behaves. At best it assist with understanding of mechanics.

            Regarding drawbacks to cash value life insurance. We’ve discussed numerous times. And I thought we were pretty clear here on most of the drawbacks:


          • If you are indeed speaking only to people who have already decided that cash value life insurance is the right product for them, then I applaud your effort to make that decision as beneficial to the investor as possible.

            I would imagine, however, that not everyone who stumbles across this article is in that position. I would imagine that many people have heard of this strategy and are wondering whether it’s right for them. Obviously you cannot write all things for all people at all times, so I will not try and argue that you should incorporate everything into one blog post.

            But my main issue with articles like this is that they present their illustrations in a vacuum and use language that attempts to lead the reader to believe that something special is happening. That they are getting something for nothing. The fact of the matter is that nothing special is happening. At best, we are simply seeing the law of risk and return in action, and the comparisons to simple, alternative investment strategies is useful to provide some context to that fact.

            IUL is lower risk than an S&P 500 index fund (the index that this particular policy is tracking) and therefore provides much lower returns. To the tune of 3 times less money after the 40 years.

            As for the bond fund comparison, the results from that specific 12 year period lend more credence to the idea that the IUL returns are in line with a conservative investment strategy. Again, nothing special here. Simply the efficient market hypothesis in action.

            A fiduciary would have the responsibility of not just selling a client what they want to buy, but evaluating the client’s situation and making recommendations that are truly in the client’s best interest. That is the level of service I think that we as financial professionals should strive for, and that level of service would require us to inform the client about the multitude of alternatives and the strengths and weaknesses of each. It is in that context that I find some of the language here to be misleading.

            Along those lines, the article you link to in your previous comment seems to do a very thorough job of comparing universal life insurance to whole life insurance. Certainly valuable information, but I do not see any discussion of non-life insurance investments in there. Maybe you write about that in other posts, I don’t know. If so, some quick links to those discussions may be helpful in this article as well so that a reader happening along this post would have the benefit of your full spectrum of thinking.

            I wish you the best of luck in helping your clients get the most out of their money.

          • Matt,

            It’s called the Insurance Pro Blog, we make no attempt to hide the fact that we are experts in the topic of insurance. I don’t prescribe to the notion that everyone else is too stupid to evaluate various savings plans on their own and I also don’t believe that one person could possible know everything there is to know about all of the savings vehicles available. It’s for this very reason that we have never declared any savings option as “bad,” (and basing that declaration on an extremely flawed understanding of the product I might add) which is more than I can say for someone else…

            We do indeed have people who come to us to ask whether or not this makes sense for them. We’ve turned 11 of them away this year alone. For four of them it was a “maybe in a few years if things change,” and for the rest it was “probably never going to be in your future, buy some term insurance and focus elsewhere.”

            You back yourself into a really bad corner when you focus so intently on rate of return. There are a multitude of other considerations when it comes to financial strategy that would make various options more or less attractive. And simply comparing returns and calling them “interesting” all the while conveniently staging the conversation to try and direct people in a certain path is way more misleading.

            And three times more money? If I use your numbers, it comes out to 2.4 times more money. Not high enough to use sig figs to further inflate the difference, I’m afraid.

            And this happens under a scenario where someone magically invests in the S&P 500 itself, pays not fund maintenance fee, nor any advisory fee…I guess. If you have that deal I’ll gladly send you the people who either need to speak to someone about the equity side of their portfolio or the people for whom life insurance doesn’t make sense.

            If we use any risk measurement to evaluate risk/return of cash value life insurance, we find it has a better looking risk-adjusted-rate-of-return vs. other options. Also it has consistently been found to have a positive error term when regressed with all other common investment options (i.e. stock, bonds, managed mutual funds, index funds) so there is something at least a little bit special going on. However, if you want to insinuate even a tiny amount of intelligence on the topic of EMH, then you must realize the big boo-boo you made in bringing it up in regards to life insurance (hint: life insurance is not a traded asset).

            And while it likely won’t completely flip hypotheticals in favor of life insurance, from rate of return perspective, you’ve completely neglected the tax discussion, as this income from the life policy is tax free.

            Are these the same fiduciaries who do crazy things like categorically declare whole life insurance a bad investment supported by a straw-man argument?

        • Matt,

          You talk later on about being a fiduciary, but seem to forget a huge point of that responsibility (BTW I am a IAR and have my 6, 63, and 65). You never mention taxes when looking at your S&P index funds. Since you are well over the IRA limit and even the 401k limit, there would be some serious drag on this policy.

          A simple calculation using a very generous 12 percent over a 27 year period (with the 22702 contribution) shows a difference of untaxed amount at 4,360,544 while the taxed account has 2,820,376. The taxed number is only 64.7% of the untaxed. The drag would be similar using the real return of the S&P. Not to mention this is only using a 20% tax rate, which would most likely be higher for someone contributing this amount annually. This does not include any manager/management fee being charged by the individuals advisor (if he uses one).

          As I do asset management as well as insurance and many other things, I beleive Mr. Roberts presents a much more compelling argument. You do not include any of your charts, run everything on the best case scenario, and are missing key points in your arguments that make a serious difference in your results. Mr. Roberts runs close to the worst case scenario (long track records of 25+ years show IUL returns to be at or near 8% on most products), and gives detailed charts to back his argument.

          You also neglect the the issue of the actual life insurance need, the living benefits provided by most insurance companies, and the tax free death benefit. None of these are provided by a taxed investment account. I love asset management, but cash-value life insurance has a place and should be considered as a piece of a wholistic financial/retirement plan.

  4. I purchased an indexed universal life policy with North American back in 2008 and just received my annual statement a few weeks ago. Over the past five years, I’ve averaged about 10.49% in interest. I’m happy.

    Did I beat the market? No I don’t think so. But no one can take what I’ve got away from me, and I have a pretty nice death benefit just in case. After poking around here I’ve come to the conclusion that my policy could have been designed a little better. But I’ve still done pretty well.

  5. I am 64 years old healthy woman. I have a (removed for privacy concerns) post-tax US dollars to invest for 5-7 years till my retirement.

    I can’t take the market risk ANYMORE ( since I lost half of my money in the stock market).

    I am planning to retire in 5-7 years:

    1. What is the best strategy to adopt in my case?
    2. Is the indexed universal life policy with North American is good investment for me?
    3. What is the most “conservative” way to invest my (removed for privacy concerns). I don’t need this money during the upcoming (5-7 years). Is there any “compound interest vehicle” or investment contact that you know of?


    • Hi Hala,

      We reached out to you a few days ago via email but have not heard back. I figured we could reply here in case that email ended up in your spam folder.

      We’d be happy to discuss this with you and offer up some ideas.

      Thanks for stopping by.


  6. I ate a lot of popcorn on this one. What is Matt’s opinion of WLI and ULI? I would hope he reply would be it depends and not they are to be avoided, by term. If that is his stance he is not a fiduciary, IMO

  7. I stopped reading all the back and forth with Matt. too much. I will say, to Matt, you are not considering risk tolerance of consumer for one. So why not compare the insure to money invested in an international index or a single stock like say Microsoft. I’m sure they have superior gains to the S&P. WLI and IUL insurance are at a greatly reduced risk profile. You can speak of “what ifs” as in what if the insurance carrier defaults but then you can discuss what ifs for every scenario as well. Many people looking at permanent insurance would NEVER invest 100% of their assets in the S&P, only a % of allocation based on risk tolerance. SO your comparison is faulty out of the gate.

    Matt also forgot to deduct the cost of term insurance, from his scenario as well as taxes paid on withdrawals

  8. Very interesting blog. I can see the difference here is the inability of some folks to admit the multi use benefits of permanent life coverage over a long period of time.AS Ron Reagan said I wont hold youth and inexperience against them.
    I have a 6/63/65 manage money and do insurance for 42 years with real humans.They dies,get sick,lose business deals etc.I can buy any investment net and I own a mix of 6 million in Whole life/UL.VLI/EIUL why ? Im not sure who will turn out best but Im an asset allocator .I have used my own vast cash value to fund business expansions,education,emergency loans and more .I never planned on using it for tax free retirement income but that is just one of the advantages over my funds and retirement accounts.Plus my family has huge death and LTC benfits included.(just my 2 cents ) keep up the good work.

  9. You would also have to consider the recapture of term premium and the lost opportunity cost of that premium, over your lifetime, which would be an external return on the life insurance policy.


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