Structured Wealth Strategies

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Why Use Whole Life Insurance for Retirement

If you are like most hard-working Americans, you’ve likely developed a strategy for your retirement using traditional retirement plans like a 401(k), 403(b), IRA, or even a Roth IRA.

Each of these plans makes sense for retirement because they force the account holder to contribute a portion of their income towards retirement. Certainly, in today’s economy, Social Security or Railroad Retirement benefits alone will not provide the income you’ll require when you finally decide to stop working.

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Traditional retirement plans will help create wealth over your lifetime, but once you understand how much of this wealth you can actually keep when you decide to start drawing your funds out can be disappointing if not downright cruel.

When and if you discover that the federal government plans to feed on your wealth when you need it most (hopefully before you retire), you’ll likely accuse your tax-hungry legislators of cruel and unusual punishment.

The good news is if you have about ten or more years before you uncork the champagne at your retirement party, there is still enough time to invest in a retirement strategy that will allow you to keep what is yours.

In this article, we’ll discuss how using Whole Life Insurance for Retirement is a better way to keep more of the wealth you accumulate and enhance your strategy with very little risk or income tax liability when you decide to use your cash value as part or all of your retirement income.

The Benefits of Whole Life Insurance

Whole life insurance is a type of insurance that provides coverage for your entire life. It also has the added benefit of building up cash value over time, with tax advantages. A portion of each premium is set aside and then credited to the policy’s cash value, which can act as an alternative to saving.

There are four essential benefits that make whole life insurance much more than purchasing just a death benefit.

1. Permanent Insurance Coverage

When it comes to life insurance, there are two main types of policy – term and permanent. A term life insurance policy is only active for a set period of time, after which you will need to renew it or take out a new policy. This can become increasingly expensive as you age. On the other hand, a permanent life insurance policy (such as whole life insurance) remains in force until you reach a certain age (often 100 or above)

2. Locked-in Premiums

Unlike term life insurance, which expires after a set period of time and must be renewed at a higher rate, whole life insurance provides lifelong coverage with level premiums. This makes it an advantageous choice for younger, healthier policyholders when insurance rates are lower.

3. Builds Guaranteed Cash Value

As you make each policy premium payment, a portion of it is used to cover the insurance and administrative costs. The remainder of the premium payment goes into building up the tax-deferred cash value of the policy. Over time, this cash value can accumulate significant wealth.

4. Dividends

Whole life insurance policies from mutual companies make policyholders owners of the company. This means that when the company earns profits, policyholders may be entitled to dividends. While this is not guaranteed, many top mutual insurers pay their policyholders dividends each year.

Later in this article, we will discuss how dividends can impact the cash value over time, thus enhancing the ability of your participating whole life insurance policy to create significant wealth.

How Whole Life Insurance can Complement your Retirement Planning

When you retire and begin drawing income from a traditional retirement account, tax liabilities and market conditions can impact the value of your account and your ability to maintain your lifestyle. A downturn in the stock market or an increase in interest rates can reduce the cash values in your account, making it difficult for you to cover essential expenses.

On the other hand, if you’re looking for a strategy that will insulate you from market downturns, whole life insurance is a good option. The cash value in a whole life policy grows guaranteed, regardless of what’s happening in the market. So if you need to access some cash, you can do so without having to sell any investments that may have lost value but could rebound later.

  • Different types of strategies offer different tax benefits. For example, with a policy’s cash value, you can defer taxes until later. This can be helpful if you are risk-averse and want to grow your cash value more predictably. However, premiums paid into your whole life policy are not tax-deductible like they would be in an IRA.
  • The money you withdraw from your policy is not subject to income tax, up to the amount you paid into the policy. So, if you have paid $300,000 into your whole life policy over the years, you can withdraw up to $300,000 without having to pay any income tax on that money. Additionally, any dividends you receive from the insurer are tax-exempt as well.
  • Unless your whole life policy is a Modified Endowment Contract, you can borrow money from the insurer for any reason by collateralizing the loaned amount with funds in the cash value account. The interest that you’ll pay for the loan will likely be offset by the interest being earned in your cash account because the collateralization does not prevent the account from continuing to earn interest.
  • Whole life insurance is a low-risk, guaranteed insurance product that can add stability to your long-term retirement strategy and provide additional tax-exempt income during your retirement years.

Participating vs Non-Participating

Simply stated, a participating whole life insurance policy can earn dividends each year when the company’s investments return a profit. Dividends are only paid by mutual insurance companies that are organized so that policyholders own the company rather than stockholders.

Typically, mutual insurance companies will pay out dividends annually with a few exceptions. Since the dividends are not considered income, policyholders who are entitled to dividends will receive them tax-free and have several options in receiving their dividend payment.

  • Use dividends to purchase paid-up additional insurance – Purchasing paid-up additional insurance is a way of increasing your whole life insurance coverage without having to provide proof of insurability. This type of policy is “paid up” when purchased, meaning that no further premiums are required. Paid-up additional insurance also accumulates cash value on a tax-deferred basis and is eligible for dividends, like your base policy.
  • Reduce your premium payments – Whether you pay your premiums on an annual, semiannual, or quarterly basis, you can elect to have your dividends credited towards your premium payment. Dividends are credited on your policy anniversary and can be used to reduce your anniversary bill, paid out to you in cash, or applied to reduce your loan amount.
  • Paid in Cash – If you elect this option, your insurance company will issue you a check for the total amount of dividends due.
  • Reduce an outstanding loan payment – You can direct the insurance company to your dividends towards an outstanding loan.
  • Left with the insurance company to accumulate interest – If you choose this option, your dividends will earn interest at a set rate. You can withdraw these dividends without affecting your policy’s cash value or death benefit; however, once withdrawn, they cannot be re-deposited.

Additionally, policyholders can change their preferred method of receiving dividends at any time to accommodate their needs and circumstances.

On the other hand, a non-participating or non-par policy simply means that it is not eligible to receive dividend payments even if purchased from a mutual insurance company.

Participating vs Non-Participating Comparison Chart

Aspect Participating Non-Participating
Definition A participating whole life policy allows the policyholder to share in the profits of the insurance company. The profits shared are referred to as dividends or bonuses. A non-participating policy is not eligible to share in the insurance company’s profits and is often referred to as a without-profit or non-par policy.
Payments Company dividends or bonuses are typically paid out on an annual basis. Since profits are not shared, no payments are made by the insurance company.
Guarantees Dividends paid out on a participation policy are based on the insurer’s performance and as such, not guaranteed. Since the policy is non-participating, no payments will be made,
Benefits a participating whole life policy offers a guaranteed death benefit, guaranteed interest on the cash value, and dividends based on the company’s performance. The non-participating whole life policy offers a guaranteed death benefit and guaranteed interest paid to the cash value account

Does Whole Life Insurance mean You’ll make Payments for Life?

Most insurance companies that offer whole life insurance offer several different periodic payment plans. Depending on the company you select and the product they offer, applicants and policyholders can elect to make payments over 10 years, 20 years, to age 65, or monthly.

The most common options are

  • 10-pay – pay for 10 years and then the policy is paid up for life (best for accumulating wealth)
  • 20-pay – pay for twenty years and then the policy is paid up for life
  • Pay to age 65 – pay to age 65 and then the policy is paid up for life
  • Pay to 100 – payments are typically paid until the death of the insured

How Whole Life Insurance can Help During Retirement

Your retirement plan is important, and when you include a permanent life insurance policy purchased from a mutual insurance company, you can be sure that your policy’s cash value will keep growing steadily. The interest earnings are guaranteed and tax-deferred, so you can enjoy your retirement without worry.

If you are looking for a way to secure your financial future, whole life insurance from a mutual company may be the answer. Highly rated and with a long-term focus, these policies can give you peace of mind knowing that no matter what happens, you and your family will be taken care of.

Whole Life Insurance is Tax Efficient

The tax system is designed in a way that causes us to pay more taxes as we earn more money. This is especially true when we retire and need to access our 401(k) or IRA. Withdrawing money from these accounts comes with a tax liability attached, which can be a burden when we are already on a fixed income.

When the time comes to access the wealth you’ve accumulated in your whole life insurance policy, you do it by borrowing from the insurance company and using your cash value as collateral. Using policy loans to access your cash value is tax efficient because the loans you take each year are tax-exempt.

Additionally, since you’re not actually withdrawing the funds from your cash value account, the collateralized funds will continue to earn interest and dividends.

You can access your living benefits if serious illness strikes or to pay for Long-term Care

The thought of outliving your retirement planning is scary. But what’s even scarier is becoming ill and needing to spend time in a long-term care facility. If this happens, you can use the Long-Term Care rider in your whole life insurance policy to access a portion of the death benefit to help cover these costs. So while it’s not a pleasant topic to think about, it’s important to be prepared just in case.

This accelerated death benefit rider can also be used to help with medical expenses if you are diagnosed with a terminal, critical, or chronic illness. If the worst thing other than death happens, a properly designed whole life policy can provide the funds you need while living.

Dividends will help your policy accumulate significantly more wealth for your retirement

When you purchase a participating whole life insurance policy from a mutual insurance company that has historically paid dividends to its policyholders, your life insurance retirement plan will continue to create wealth when other traditional plans are impacted by a volatile stock market.

These dividends can be used to purchase paid-up insurance policies which in turn will earn interest and dividends as well. Over the years your insurance retirement plan will become a cluster of money-making machines just waiting for you to tap those funds in retirement.


Examples of Using Whole Life Insurance for Retirement

Listed below are two examples of real-life cases where the individuals realized that their traditional qualified retirement plans would be severely impacted by income taxes when the time comes to begin withdrawing money for retirement.

Moreover, both clients were quick to complain about federal constraints such as contribution limits, early withdrawal penalties, and required minimum distributions.


Sarah Jones Age 55

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Sarah Jones is a 55-year-old healthy female non-smoker who is concerned about not having sufficient retirement income because of market volatility and her tax liability since her traditional retirement plan was created with pre-tax dollars.

Ms. Jones was looking for the following benefits:

    • A guaranteed lifetime death benefit

    • Guaranteed premiums based on the Policy Payment Period

    • Predictable cash value growth without market risk – plus the ability to access cash value for any reason

    • An opportunity to build additional cash value through non-guaranteed dividends

    • Access to cash in the event she was diagnosed with a critical illness and needed long-term care

We recommended the Guaranteed Whole Life II product from Penn Mutual Life Insurance company. Here are the policy details offered by Penn Mutual:


Initial Premium $69,999.73
Initial Death Benefit $1,563,100
Payment Period 45 Years
Dividend Scale Current
Dividend Option Paid-Up Additions

Non-Guaranteed Values

Non-Guaranteed Values at Age 66 When Ms. Jones Begins withdrawing $48,000 Annually in Tax-Exempt Income

Optional Riders

Ms. Jones selected the following riders to financially protect herself in the event of expenses related to severe illness.

  • Accelerated Death Benefit for Terminal Illness
  • Accelerated Death Benefit for Chronic Illness


Ms. Jones also selected the Overloan Protection Rider which keeps her policy in force despite outstanding loans from the insurance company. She also opted for the Permanent Paid-Up Additions Rider which allows her to increase her policy cash value, potential dividends, and death benefit by purchasing paid-up insurance.


Alexis Smith

Ms. Smith, like Ms. Jones,  is a very healthy female non-smoker and 43 years old. She is concerned that she will not have sufficient funds in her 401(k) and that her retirement income will be considerably impacted by her tax liability when she begins withdrawing an income stream in retirement.

Ms. Smith was looking for the following benefits:

  • A guaranteed lifetime death benefit
  • Guaranteed premiums based on the Policy Payment Period
  • Predictable cash value growth without market risk – plus the ability to access cash value for any reason
  • An opportunity to build additional cash value through non-guaranteed dividends
  • Access to cash in the event she was diagnosed with a critical illness and needed long-term care

We recommended Penn Mutual’s  Guaranteed Whole Life II product Here are the policy details offered by Penn Mutual:

Initial Premium $20,000.00
Initial Death Benefit $1,000,000
Payment Period 57 Years
Dividend Scale Current
Dividend Option Paid-Up Additions,

Unlike Ms. Jones, Ms. Smith elected to have her account accumulate as much wealth as possible, without taking funds at any particular age, and intends to pay $20,000 annually into her policy until age 65. Ms. Jones has elected to receive all dividends as paid-up additions,


Basic Ledger

Guaranteed and Non-Guaranteed Values

Notice the difference in total cash value at age 70 when anticipated non-guaranteed dividends accumulate over time.


Optional Riders Included

Alexis Smith elected the following optional riders to be added to her policy:


  • Accelerated Benefit Rider for Terminal Condition
  • Accelerated Benefit Rider for Chronic Illness
  • Overloan Protection Benefit Rider

Who Should Consider Using Whole Life Insurance as Part of Their Retirement Strategy?

There are two main reasons why it is typically better to buy whole life insurance when you are younger. First, your premiums will generally be lower and will never increase. Second, if you choose to use the cash value growth to supplement retirement income, you will have more time to accumulate it if you start your policy when you are younger.

One of the best times to get a whole life insurance policy is in your mid-40s. You’re usually in good health at that age, which can help you qualify for lower rates. And you will have more time to build significant cash value in your policy.

However, as illustrated in this article, purchasing a participating whole life insurance policy in your 50s can deliver a considerable income stream that is tax-exempt and become a critical addition to your retirement strategy.

In Conclusion

Many people are unaware of the benefits that Whole Life can provide in terms of maximizing one’s net-spendable income during retirement. Whole Life’s unique growth strategy and favorable tax treatment make it an ideal addition to a diversified portfolio of retirement assets.


Frequently Asked Questions

What are the Benefits of Using Whole Life Insurance for Retirement?

Whole life insurance offers a unique blend of benefits for retirement planning. It provides a guaranteed death benefit, ensuring financial security for beneficiaries. Additionally, the policy accumulates cash value over time, which can be borrowed against or withdrawn for retirement needs. This cash value grows on a tax-deferred basis, offering a potential source of tax-advantaged income in retirement.

How Does the Cash Value in a Whole Life Insurance Policy Work?

The cash value in a whole life insurance policy grows over time, based on the premiums paid and the policy’s interest rate or investment returns. Policyholders can access this cash value through loans or withdrawals, providing a flexible source of funds. It’s important to note that withdrawals can reduce the death benefit, and loans must be repaid to avoid reducing the policy’s value.

Is Whole Life Insurance a Good Investment for Retirement?

While whole life insurance is primarily an insurance product, it can be a part of a diversified retirement strategy. The cash value component offers a conservative investment with steady growth, which can complement more aggressive investments. However, it’s important to consider the policy’s fees and the fact that returns may be lower compared to other investment options.

Can Whole Life Insurance Provide a Steady Income in Retirement?

Yes, whole life insurance can provide a steady income in retirement. Policyholders can set up a schedule of withdrawals or loans against the policy’s cash value. This can create a consistent stream of income, although it’s crucial to manage these withdrawals carefully to ensure the policy remains in force and the death benefit is preserved.

What Happens to the Death Benefit When I Use the Policy for Retirement?

When you use the cash value of your whole life insurance policy for retirement, it can affect the death benefit. Withdrawals reduce the death benefit dollar for dollar, while loans reduce it if not repaid. However, if managed properly, the policy can still provide a significant death benefit to your beneficiaries.

Are There Tax Implications When Using Whole Life Insurance for Retirement?

Yes, there are tax implications to consider. The growth of the cash value in a whole life insurance policy is tax-deferred, meaning you don’t pay taxes on the interest, dividends, or capital gains until you withdraw the funds. Loans against the policy are generally tax-free as long as the policy is in force. However, withdrawals above the premium amounts are taxable. It’s advised to consult with a tax professional for specific advice.

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Curt Gibbs