Using Whole Life Insurance to Create a Pension Income Stream

Today I am presenting a guest post from a fellow personal finance blogger who proposes an interesting strategy for using whole life insurance as a way to generate retirement income. I will have some comments about this strategy at the end of the post.

Evan from My Journey to Millions is a New York attorney who works as a support staff in a large financial planning firm, has a small Trust and Estates Practice and is the sole owner and author of My Journey to Millions.  His blog discusses estate planning, insurance planning and his personal struggle from a broke law school graduate to his dream of netting millions.  Check out his blog for more information, or better yet just subscribe to his feed.

Using Whole Life Insurance to Create a Pension Income Stream

One of the most common themes that I see among soon to be retirees is the question/concern about a steady stream of income.  It is a very natural concern, and I’d like to present one more way that is often slammed by the mainstream media.  So, in order for you to fully grasp this particular guest post I am going to have to beg you to put down your Suze Orman book or turn off the Dave Ramsey radio show.

Rather then discuss fees, expenses, mortality charges, IRR, etc. I am going to build a real example using a real illustration program from a AAA rated insurance company. I will then compare that option to various returns.

Let’s choose our variables:

  • 50 Year old Male;
  • Non-Smoker;
  • I will use the  2nd highest health rating (not a beacon of health but not standard);
  • Like a “real” pension we are going to pay into the system until retirement in this case 65 (Chose a product that stops premiums at 65 automatically);
  • We are going to pay into the system $1,000/month; and
  • Going to take an income stream from 70 to 85.

All these variables will change the whole model, I just made these up because if I had to venture a guess Mr. GoTo’s demographic is likely to be around these variables.  Why did I choose 70 as a starting age? Well the cash value is growing tax deferred so why not let it grow for as long as possible?

In Year 2011 $12,000 will buy just about $319,000 in death benefit which will grow (non-guaranteed) to over $420,000 of death benefit when the client is 65.

  • Then from age 70 to to 85 you will be provided $27,200/year tax  free (through loans and switching at basis)
  • At age 85 there will still be a death benefit of a little bit over $130,000

Is this method perfect? No.  There may be tax issues if the policy crashes, but neither is the standard 401(k) as we all learned, both young and old.  Imagine if you were the one trying to retire in 2002, or more recently 2007.  My firm saw an increase in the amount being deposited with the insurance company (above their premium) because it was their only account that increased in value.

Comparing Whole Life Insurance as a Pension Income vs. Investing

This strategy is not going to work if you are getting 12% return, or even 8%…but if you are 63 and are in 100% equities then I am sure Mr. Tough Money Love will have something to say to you.  (Editors Note: Yes I will!) So, lets use a 4% net return (so we can either assume your holding muni’s or netting 4% on your portfolio).

Year Age Balance Interest Withdrawals End of Year Balance
15 65 $246,911
16 66 $246,911 $9,876 $0 $256,787
17 67 $256,787 $10,271 $0 $267,059
18 68 $267,059 $10,682 $0 $277,741
19 69 $277,741 $11,110 $0 $288,851
20 70 $288,851 $11,554 -$27,211 $273,194
21 71 $273,194 $10,928 -$27,211 $256,911
22 72 $256,911 $10,276 -$27,211 $239,976
23 73 $239,976 $9,599 -$27,211 $222,364
24 74 $222,364 $8,895 -$27,211 $204,048
25 75 $204,048 $8,162 -$27,211 $184,999
26 76 $184,999 $7,400 -$27,211 $165,188
27 77 $165,188 $6,608 -$27,211 $144,584
28 78 $144,584 $5,783 -$27,211 $123,157
29 79 $123,157 $4,926 -$27,211 $100,872
30 80 $100,872 $4,035 -$27,211 $77,696
31 81 $77,696 $3,108 -$27,211 $53,592
32 82 $53,592 $2,144 -$27,211 $28,525
33 83 $28,525 $1,141 -$27,211 $2,455
34 84 $2,455 $98 -$27,211 -$24,658
35 85 -$24,658 -$986 -$27,211 -$52,855

This is all without a death benefit to go along with it.  If I use 6% net (8%+ gross) then I can safely say that the investments will “win.”  This strategy, on the other hand is relying on a AAA rated Company that has been around longer than some states.

Disclaimer: While I am licensed to sell life insurance, I have never sold a single policy nor do I own any whole life insurance since The Wife and I have different priorities right now.  I hope to purchase a policy by the end of the year.

Does anyone have any experience with this strategy?

Mr. GoTo’s comments:

Most personal finance writers not connected with the insurance industry will tell you that term insurance is preferred over whole life insurance as a financial tool to protect dependents in the event of your premature death. I agree with that. Yet I like this post from Evan because it discusses alternative uses of cash value life insurance.

Keeping in mind that most of the money you take out of a cash value insurance policy is a return of your own premiums, it is a way to achieve tax deferred growth, or even “tax free income” if you are willing to periodically borrow from your cash value and not repay it. You have to be careful, however, of the potential tax consequences of dying with policy loans outstanding.

As Evan acknowledges, the net investment returns achievable from cash value life insurance can be inferior to the alternatives. Nevertheless, there are wealthy investors who use cash value life insurance for tax and estate planning when they run out of better options.  If you plan on being this wealthy and need death benefit protection, it can’t hurt to at least consider this “life insurance as pension” strategy now.


  1. Ron Manuel says

    The subject of life insurance in retirement reminded me of something I’ve never seen addressed by any authors/experts–life insurance to protect against loss of Social Security income upon a spouse’s death.

    Years ago when I taught personal money management at the college level, I told students that life insurance should only be used when someone is dependent upon your income. I always assumed that in retirement when earned income ceased that there would be no need for life insurance.

    But I’m now counting both on Social Security not going bust and on both my wife and I collecting it based on our own earnings records for part of our combined source of income in retirement. If I die early, my wife can of course switch over to my somewhat higher benefit, but our expenses won’t reduce by 50% when one of us dies. I’m now seriously considering continuing life insurance in retirement at an amount approximating the present value of future Social Security benefits.

  2. Patrick The Insurance Guy says

    As a licensed life insurance agent for 8 years I always strongly encourage my clients to have tax qualified accounts (401k, 403B, IRA’s, etc.), and I encourage them to carry Cash Value Life Insurance (Whole Life, or some form of properly funded and structed Universal Life) to suppliment their retirement income.
    While there are several schools of thought about Cash Value Life Insurance one should ask themselves; “Do you believe taxes in our great nation will be rising in coming years or falling?” If you believe, as many do, that taxes will rise, then you should at least consider the potentially tax free benefits that Cash Value Life Insurance will offer.

  3. says

    Whole life insurance is a fairly crappy way of getting insurance — but can be an incredibly useful financial product for other reasons. The very wealthy, for example, might put quite a bit into a policy simply because if they go bankrupt they’ll have something to fall back on.

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