Cash value life insurance and annuities have been used to provide pension benefits long before 401k's and IRA’s came into existence. These are the only asset classes that can provide lifetime income, no matter how long you live.

Even if they run out of money, they never stop paying income. And income is important because it is used to pay for the things we need or want. 

Features of cash value life include:

•Tax Deferred Growth
•Tax Free Income
•A Market Driven Rate of Return
•No Loss of Principal
•Liquid
•Tax Free to Your Heirs

But what do these things actual mean and do for you?

Cash value life insurance, when properly designed is capable of costing far less than an investment account.

It is true that in the early years of the policy, the cost is higher compared to a typical investment account, however, over the long-term accumulation of an account, cash value life insurance cost much less than other investments.

 Why or How? Because the cost of insurance, which is a major cost component of a cash value life policy can be designed to get increasingly smaller as the cash value account builds over time. So as the cash value gets larger, the cost of the policy get smaller.

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Comparatively, as investment accounts get bigger, the cost for the investment also get bigger.

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This is a basic cost example. If you want to discuss further, click HERE.

Using both taxable and tax-free accounts to accumulate and distribute income is a form of tax diversification.

Taxes is a constantly changing filed and so who knows what the future has in store for taxes. They seem to go up, then down then back again. People have all kinds of theories and speculations about taxes. Economist illustrate that taxes are related to government revenues. The Laffer curve is one such economic theory on the connection between tax rate and government spending or revenues that is rooted back to the 14th century.

The importance of planning into the future

Tax diversified strategies are nothing new. Strategist promote and employ sophisticated tax planning solutions all the time. This is an area in finance where you should seek the advice of a licensed professional in your area.

For illustrative purposes, the diagram below illustrates how having a portion of tax-free income provides greater amounts of money to spend in retirement. 

What happens to a savings or retirement plan if:

An investor contributes $50,000 a year for 7 years into an investment account, then dies. Is that enough to provide for his family? Even if he made a great rate of return on his contributions, it’s likely that the family of someone who can make regular contributions of $50,000 a year will not be oaky for long.

Worst yet, what if the same person got sick enough to lose his income. Normally, when a person suffers a disabling illness or injury, the cost to a family increase due to increase medical expenses, in addition to the loss of that person’s income.

In this way, some situations can be worse than death.

One possible solution to these problems is cash value life insurance. Besides being designed to accumulate cash value, these policy’s can provide a death benefit and cash for critical and chronic illness.


How does guaranteed lifetime income from a cash value policy compare to the possibility of running out of money?

Some people may have the time and expertise to manage withdrawals from their accounts. And they may be unlike most people, according to research that make investment mistakes as the get older. These people may be familiar with and practice according to the 4% rule.

What is the 4% rule and the related sequence of returns risk?

“Sequence of returns risk can be an unexpected event that can quickly deplete a portfolio in retirement.”
The four percent rule is a term developed by the financial planning industry which states the percentage amount a person can withdraw from their accounts through retirement. It also comes with the risk of depleting your money before the need is gone, that is before you die.

As you can image, a theory like this can have devasting affects on a persons livelihood. In general, rules of thumb, I believe are good to explain a concept but can be dangerous if taken literally.

For instance, since the four percent rule was first published it has since been reduced to about 1%. According to the new rule, in order to lessen your chances of running out of income, instead of withdrawing 4%, you should look at withdrawing a bit over 1% from your accounts. Essentially, you need to live on less for your money to last until it’s no longer needed.

Making matters more complicated is the timing of the income start date. There is a greater risk of depleting your account based on the day you start to take income form your accounts. This is called sequence of returns risk. 

Hypothetical example for illustrative purposes only
1Assumed marginal federal income tax bracket under current rates for married filing jointly.
2If structured properly. Policy loans and partial policy value surrenders will reduce the death benefit of the policy and may cause the life insurance policy to lapse. Distributions exceeding cost basis will result in taxation.
3The cash value in a life insurance policy is accessed through policy loans, which accrue interest at the current rate, and cash withdraws and loans will decrease the total death benefit and total cash value. Policy values are based on non-guaranteed factors, such as dividends and interest rates, which are subject to change. Therefore, the supplemental income is not guaranteed.