I can create a simple model to consider four different potential roles for this whole life insurance policy in retirement income planning. First, the death benefit for life insurance provides a method to meet a legacy goal using risk pooling and tax advantages that is distinct from preserving investment assets for this purpose. This can allow the retiree to potentially enjoy a higher standard of living in retirement than otherwise possible, while also ensuring that assets have been earmarked to meet the legacy goal.


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Second, a permanent death benefit supported through whole life insurance can be integrated into a retirement income plan by helping the retiree to justify the decision to buy an income annuity and to overcome the behavioral hurdles that lead to the annuity puzzle. It can also allow the retiree to purchase a life-only single life annuity that offers the most mortality credits to the risk pool and therefore offers the highest payout rate to the owner. Wealth Building Cornerstones, the firm that developed this strategy, calls it the covered-asset strategy.

The key idea is that the retiree can feel comfortable buying an income annuity because of the understanding that the life insurance death benefit will return the amount spent on the annuity premium to the household at the time of death when annuity payments cease. As opposed to obtaining a form of life insurance for the household through the annuity by adding cash refund provisions or a joint life option, this integrated approach with a separate life insurance policy creates greater flexibility for the household by reducing the required annuity premiums needed to meet a spending goal.

Next, the cash value of whole life insurance also provides a few interesting options for a retirement income plan. Cash value may serve as a volatility buffer to help manage sequence risk in retirement. This strategy was also developed by Wealth Building Cornerstones. Cash value does not experience downside risk for capital losses in the face of rising interest rates. It is guaranteed to grow and can provide a temporary resource to supplement retirement spending rather than being forced to sell portfolio assets at a loss during poor market environments.

Finally, when considered net of fees, taxes, and insurance needs, cash value accumulation within a whole life policy can serve as an alternative and competitive means for investing in fixed-income assets as opposed to using bonds or bond funds within a traditional investment portfolio. We consider each of these four ideas in turn with a case study.

*This is an excerpt from Wade Pfau’s book, Safety-First Retirement Planning: An Integrated Approach for a Worry-Free Retirement. (The Retirement Researcher’s Guide Series) and was originally published in Forbes on Jan. 14, 2021.

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Brian Brotherston
Qualified Associate Financial Planner
Watershed Financial Solutions
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