Use Cash Value Life Insurance to Create Retirement Income

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.

About the Author Brantley Whitley

Brantley is a practicing life insurance agent and has been for nearly 18 years. After years of trying to sell like his sales managers wanted him to, he discovered that people want to buy life insurance if you actually explain the benefits.

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