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There is a common mantra echoed throughout the financial community that “you won’t need Whole Life insurance in retirement.”
Because you have been such a responsible saver and a prudent investor, it’s probable that you won’t need any Whole Life insurance product once you start taking retirement income.
However, below are 3 powerful reasons why you may want some Whole Life insurance for retirement allocated amongst your portfolio even though you may not necessarily need it.
#1: Whole Life as a Risk-Buffer in Retirement
Whole Life insurance is completely uncorrelated to the stock market. It has a unique growth methodology where you get to participate in the insurance company’s underwriting profits including profits they make from their other non-Whole Life insurance products. Not only that, but there is a contractual growth rate on your cash value guaranteed to you throughout the life of the entire contract even if there are no profits.
So with a block of Whole Life insurance, you have some form of bedrock at the base of your portfolio.
If there is a market crash and you have a block of assets allocated to Whole Life insurance during retirement, you could take your immediate income needs from your policy, thereby allowing your stocks and mutual fund accounts to heal. Otherwise, in a down market, you must redeem significantly more shares of your stocks or mutual funds to meet your ongoing standard of living.
Once consumed, these shares can no longer participate in the next market rebound. If you could only wait until the market recovered or better yet achieved new highs, you could redeem far fewer shares of your stocks or mutual funds to produce the exact same income.
Picture yourself with a pool of assets immune from the crash inside of Whole Life insurance so you can still enjoy an uninterrupted standard of living during these years while your stock portfolio licks its wounds.
Watch the video below and jump to minute marker 6:09 to see the profound impact that Whole Life insurance can have on a safe withdrawal strategy in retirement.
#2: Whole Life as a Tax-Buffer in Retirement
Many high-income-earners are unaware that the tax-treatment of Whole Life insurance is very similar to a Roth Account, only without all the barriers to entry. Because there are no high-income limitations and no $5,500 annual maximum on contributions, Whole Life is often called “the Roth of the rich.”
So although you may not need any Whole Life insurance during retirement, you will probably want it for its tax treatment.
Here’s why:
Most of your other sources of retirement income will be taxable in some way, shape, or form. None of the following are immune from Uncle Sam:
- Rental Real Estate
- Taxable Brokerage Accounts
- Tax-Deferred Annuities
- Social Security
- Deferred Compensation plans
- Retirement Accounts IRAs, 401(k)s, Profit Sharing Plans, Defined Benefit Pensions, etc.
As tax rates continue to change with the different regimes occupying Congress during your retirement, what if you could “time your tax” by toggling the amount of taxable retirement distributions you want each and every year.
Imagine withdrawing amounts from your taxable sources right up until you reach those really ugly tax-brackets and then supplementing the rest of your desired lifestyle using Whole Life’s tax-exempt distributions.
The more that tax rates rise for the wealthy, the more you will wish you had assets allocated to Whole Life insurance. Even if some alleged “tax reform” occurs in the future, remember that there will be gravity for the pendulum to swing back the other way.
You can either proactively prepare or react and adjust.
#3: Whole Life Insurance for its Death Benefit in Retirement
Once informed about the unique tax and risk-management characteristics of Whole Life, the death benefit is often the least appealing feature for clients. However, you shouldn’t discount the utility of a permanent death benefit in the context of retirement planning.
Here’s what I mean:
If you knew that you had a guaranteed accounts-receivable that your spouse and children would receive tax-free at your death, wouldn’t you increase your consumption of retirement assets during your lifetime?
Of course you would!
The existence of a permanent death benefit allows you to more aggressively spend down other assets in your portfolio. Even if you fully exhaust your other accounts shortly before life-expectancy, there would be so much available cash value inside your Whole Life policy for retirement income. Not to mention you would have an even bigger tax-free death benefit to replace the part of your nest-egg you consumed.
What if you got chronically ill or critically injured?
Statistics show that one out of two retirees will need some sort of “Long-Term Care” whether in a facility or in the comfort of their own home.
Did you know that certain Whole Life insurance policies have special riders or policy stipulations that allow you to legally access the tax-free death benefit for these reasons even though you haven’t died?
The finer details will vary by product and company, but these provisions are becoming more and more common with Whole Life insurance.
#4: Whole Life Insurance as a Better Holding Tank for Pre-Retirement Liquidity
Everyone needs to keep a certain amount of safe and liquid reserves, especially on the way to retirement.
If you’re a real estate investor or business owner, you probably have considerably more money in cash than you have invested in the market. Even for W-2 employees, the rule of the thumb is to have somewhere between 6-12 months of expenses in cash.
That way you can tap your reserves without worrying about any kind of losses. Usually, when cash is truly king, the sky is falling everywhere else.
Keeping 5 or 6 figures parked in cash creates a lost opportunity cost, meaning you’re costing yourself all the growth you’re NOT earning on that money.
What if you used Whole Life insurance as the receptacle for your safe and liquid reserves instead?
What if you kept enough in your checking account to manage your month to month expenses, while your longer-term reserves were compounding safely inside of Whole Life Insurance?
Did you know that the 2 biggest banks in America each have over $20 Billion Dollars of their customers’ deposits invested in Life Insurance policies taken out on their key executives?
That’s why our motto is “Don’t do what banks say… Do what they do!”
They know the contractual guarantees of life insurance are the only way to simultaneously keep money liquid and grow it without taxes or market risk.
Watch our 4-minute video examining the balance sheets of the two biggest banks in America with data from straight from the FDIC website.
Let’s not forget too, that being liquid at the right time can substantiality boost your retirement savings. Think about all the opportunities you could have capitalized on if you were highly liquid following the crash of 2008. What you wouldn’t do is cash out stocks that lost 50% to buy depressed real estate or vice-versa.
Maybe if your cash equivalents actually got some kind of decent growth rate (like it can in Whole Life insurance), you wouldn’t mind keeping more of your assets safe and liquid. There’d be no need to press in good years since your Whole Life wins every year, and no need to worry when the sky starts falling again.
Imagine the positive impact on your retirement if you had all your assets working for you all the time, even your safe and liquid cash… or cash value rather. You would be well-positioned to capitalize on timely opportunities whenever the sky starts falling again, without a lost opportunity cost while you wait.
Closing Thoughts:
Most people overlook the unique utility that Whole Life can provide to clients wanting to maximize their net-spendable income throughout retirement. Whole Life’s rare growth methodology and favorable tax treatment make it the ideal complement to a diversified portfolio of retirement assets.
Happy Banking,
John “Hutch” Hutchinson
ChFC®, CLU®, EA, AEP®, CExPs®