Protecting Your Nest Egg With Whole Life Insurance

Tim's Story

Drag to Reposition
Move Up or Down to Reposition
Move Left or Right to Reposition

Tim came to me with a common, but also difficult-to-solve, problem. He and his wife wanted a safe and secure place to save money, but wasn’t totally satisfied with the available options in the marketplace. He had some investments, but was concerned about their volatility and also the taxes on those investments in retirement.

On top of this, Tim is self-employed. This creates a lot of opportunity, but also a lot of risk — risk that’s not easy to plan for. After carefully analyzing his financial situation, he decided whole life insurance made sense for him.

This is his story.

The Problem

  • Tim wanted a safe and secure place to save money.
  • He was concerned about volatility.
  • He is self-employed and worried about the inherent cash flow risks of running a business.

The Plan

On the surface of it, Tim’s problem seems simple: find a safe place to store cash and then let that savings grow over time in a safe, consistent, reliable way. But, the problem Tim faced was the uncertainty of future government regulation and how that might impact his investments and the economy (and his work) and also the future taxes he’d have to pay on the money sitting in his retirement account.

In Tim’s words,

"Biggest problem I was having was finding somewhere to put my savings where it would be as safe from thieving bureaucrats as possible while still realizing some kind of growth. I’m pissed. Still am, but less so than before. Life insurance as it exists today is undoubtedly a pale imitation of what it could be in a free market, but in terms of safety (and other utility), it’s the best option I’ve discovered so far.

"There’s still a lot I need to understand about how life insurance works as a long-term savings vehicle, but for now I’m at least satisfied that some of my money is a little safer from theft and wildly arbitrary taxation.

"It’s too early to tell, but I’m cautiously optimistic. I’m currently putting about 20% of my savings into life insurance, with the rest split between precious metals, investments, and traditional retirement accounts.

"I wish life insurance could offer a better rate of return, but with an out-of-control pirate state sailing the financial seas, pillaging with impunity, I’m happy to have some measure of safety, even if it means giving up a lot of potential profit.”

When clients look at whole life insurance, they tend to think about it as a conservative investment with a low rate of return. However, in Tim’s case, that conservative asset protects him in a very important way.

How?

A Non-Correlated Asset That Protects Tim’s Other Investments

Tim puts 80% of his money into investments of various kinds. Some of those investments are in traditional retirement plans which are invested in stocks or equity mutual funds, and some are in non-traditional investments, including precious metals. With only 20% of his money going towards whole life insurance, it’s difficult to see how his policy could possibly make any sort of difference in his financial life.

But… looking a bit closer at this issue reveals a surprising aspect of life insurance as an asset.

Tim’s tentative plan is to retire at age 67. We assumed his investments in the stock market grew to about $3,000,000 by then. So far, so good.

In retirement, Tim needs 2 things from those investments: growth and income. But, he also has to accept market volatility as part of the package. This creates an interesting problem for Tim and his wife. If he draws income from his investments in a down year, it can dramatically impact his future savings and income.

For example:

YRAGEHYPOTHETICAL MARKET RETURNINVESTMENT ACCT PRE-TAX WITHDRAWALINVESTMENT ACCT AFTER-TAX NET INCOMEEND OF YEAR BALANCE
366727.25%$300,000.00$204,000.00$3,435,750.00
3768-6.56%$306,000.00$208,080.00$2,924,438.00
386926.31%$312,120.00$212,242.00$3,299,619.00
39704.46%$318,362.00$216,486.00$3,114,221.00
40717.06%$324,730.00$220,816.00$2,986,429.00
4172-1.54%$331,224.00$225,232.00$2,614,315.00
427334.11%$337,849.00$229,737.00$3,052,969.00
437420.26%$344,606.00$234,332.00$3,257,078.00
447531.01%$351,498.00$239,019.00$3,806,600.00
457626.67%$358,528.00$243,799.00$4,367,673.00
467719.53%$365,698.00$248,675.00$4,783,561.00
4778-10.14%$373,012.00$253,648.00$3,963,319.00
4879-13.04%$380,473.00$258,721.00$3,115,643.00
4980-23.37%$388,082.00$263,896.00$2,090,130.00
508126.38%$395,844.00$269,174.00$2,141,239.00
51828.99%$403,761.00$274,557.00$1,893,678.00
52833.00%$411,836.00$280,048.00$1,526,298.00
538413.62%$420,072.00$285,649.00$1,256,893.00
54853.53%$428,474.00$291,362.00$857,662.00
5586-38.49%$437,043.00$297,189.00$258,723.00
568723.45%$258,723.00$175,932.00$0.00


Tim can withdraw a pre-tax income of about $300,000 per year, adjusted for inflation (assumed to be 2% per year). The net after tax amount in his tax bracket (32% as of this writing) would be about $200,000.

At this rate, he runs out of money by age 87… which is fine if Tim and his wife dies before then but what if they live?

This is no good.

What if we assumed his retirement plan assets grew to $5,000,000? I ran that scenario using the same investment return assumptions above and… his income carried him out to age 100.

But… what if the investment returns were different than above? I re-ran the scenario several times and kept running into scenarios like this:

YRAGEHYPOTHETICAL MARKET RETURNINVESTMENT ACCT PRE-TAX WITHDRAWALINVESTMENT ACCT AFTER-TAX NET INCOMEEND OF YEAR BALANCE
3667-17.37%300,000204,0003,718,350
3768-29.72%306,000208,0802,398,200
386931.55%312,120212,2422,744,238
397019.15%318,362216,4862,890,430
4071-11.50%324,730220,8162,270,645
41721.06%331,224225,2321,959,979
427312.31%337,849229,7371,821,814
437425.77%344,606234,3321,857,885
4475-9.73%351,498239,0191,359,816
457614.76%358,528243,7991,149,078
467717.27%365,698248,675918,670
47781.40%373,012253,648553,297
487926.33%380,473258,721218,329
498014.62%218,329148,4630


Oops.

Tim would run out of money by age 80. That’s worse than the first scenario where we had less savings to play with and this scenario only assumes 4 market corrections in retirement, 2 of which are minor corrections.

The typical solution to this is kind of problem is to simply reduce withdrawals from the retirement account, but beyond age 70 1/2, the IRS forces the issue by setting a Required Minimum Distribution (RMD) amount on Tim’s retirement accounts, based on Tim’s life expectancy. So, the older he is, the more the IRS will force him to take from his investment accounts.

Another potential solution might be to use bonds or another fixed-interest investment. But, the major problem with bonds and other similar investments is that bonds have significant principal risk (risk of losing his principal amount) and also rollover risk (i.e. Tim cannot grow his bond portfolio over time to offset inflation and provide an effective hedge against his equity investments).

This is where Tim’s whole life insurance policy comes into play, allowing him to manage his income in a way that’s not possible with other assets. He can keep growing his life insurance policy’s guaranteed and non-guaranteed cash values without principal or rollover risk, then draw down his investment account and then start taking withdrawals from his life insurance policy, like so:

YRAGEHYPOTHETICAL MARKET RETURNINVESTMENT ACCOUNT PRE-TAX WITHDRAWALINVESTMENT ACCOUNT AFTER TAX NET INCOMEEND OF YEAR BALANCEINCOME FROM LIFE INSURANCENET CASH VALUE OF INSURANCENET DEATH BENEFIT OF INSURANCETOTAL INVESTMENT + INSURANCE CASH VALUETOTAL INVESTMENT + INSURANCE NET DEATH BENEFIT
366727.25%$300,000.00$204,000.00$3,435,750.00$0.00$1,842,649.00$3,583,324.00$5,278,399.00$7,019,074.00
3768-6.56%$306,000.00$208,080.00$2,924,438.00$0.00$1,950,931.00$3,694,828.00$4,875,369.00$6,619,266.00
386926.31%$312,120.00$212,242.00$3,299,619.00$0.00$2,065,144.00$3,810,435.00$5,364,764.00$7,110,054.00
39704.46%$318,362.00$216,486.00$3,114,221.00$0.00$2,185,532.00$3,930,308.00$5,299,753.00$7,044,529.00
40717.06%$324,730.00$220,816.00$2,986,429.00$0.00$2,312,326.00$4,054,552.00$5,298,755.00$7,040,982.00
4172-1.54%$331,224.00$225,232.00$2,614,315.00$0.00$2,445,803.00$4,183,442.00$5,060,118.00$6,797,757.00
427334.11%$337,849.00$229,737.00$3,052,969.00$0.00$2,586,199.00$4,317,282.00$5,639,168.00$7,370,251.00
437420.26%$344,606.00$234,332.00$3,257,078.00$0.00$2,733,820.00$4,456,254.00$5,990,897.00$7,713,332.00
447531.01%$351,498.00$239,019.00$3,806,600.00$0.00$2,888,938.00$4,600,521.00$6,695,538.00$8,407,122.00
457626.67%$358,528.00$243,799.00$4,367,673.00$0.00$3,051,891.00$4,750,348.00$7,419,564.00$9,118,021.00
467719.53%$365,698.00$248,675.00$4,783,561.00$0.00$3,222,646.00$4,905,644.00$8,006,207.00$9,689,205.00
4778-10.14%$373,012.00$253,648.00$3,963,319.00$0.00$3,401,419.00$5,066,350.00$7,364,738.00$9,029,669.00
4879-13.04%$380,473.00$258,721.00$3,115,643.00$0.00$3,588,406.00$5,232,571.00$6,704,049.00$8,348,214.00
4980-23.37%$388,082.00$263,896.00$2,090,130.00$0.00$3,783,793.00$5,404,262.00$5,873,923.00$7,494,392.00
508126.38%$395,844.00$269,174.00$2,141,239.00$0.00$3,987,498.00$5,581,231.00$6,128,737.00$7,722,470.00
51828.99%$403,761.00$274,557.00$1,893,678.00$0.00$4,199,426.00$5,764,881.00$6,093,104.00$7,658,559.00
52833.00%$411,836.00$280,048.00$1,526,298.00$0.00$4,419,960.00$5,956,586.00$5,946,257.00$7,482,884.00
538413.62%$420,072.00$285,649.00$1,256,893.00$0.00$4,649,579.00$6,156,244.00$5,906,472.00$7,413,137.00
54853.53%$428,474.00$291,362.00$857,662.00$0.00$4,888,097.00$6,363,609.00$5,745,760.00$7,221,271.00
5586-38.49%$437,043.00$297,189.00$258,723.00$0.00$5,134,065.00$6,577,589.00$5,392,788.00$6,836,312.00
568723.45%$258,723.00$175,932.00$0.00$127,202.00$5,255,387.00$6,628,808.00$5,255,387.00$6,628,808.00
578812.78%$0.00$0.00$0.00$309,196.00$5,187,314.00$6,448,315.00$5,187,314.00$6,448,315.00
58890.00%$0.00$0.00$0.00$315,380.00$5,102,646.00$6,297,485.00$5,102,646.00$6,297,485.00
599013.41%$0.00$0.00$0.00$321,687.00$4,997,782.00$6,164,398.00$4,997,782.00$6,164,398.00
609129.60%$0.00$0.00$0.00$328,121.00$4,871,247.00$6,008,481.00$4,871,247.00$6,008,481.00
619211.39%$0.00$0.00$0.00$334,684.00$4,728,653.00$5,826,906.00$4,728,653.00$5,826,906.00
6293-0.73%$0.00$0.00$0.00$341,377.00$4,563,834.00$5,617,537.00$4,563,834.00$5,617,537.00
63949.54%$0.00$0.00$0.00$348,205.00$4,370,535.00$5,378,504.00$4,370,535.00$5,378,504.00
649519.42%$0.00$0.00$0.00$355,169.00$4,144,748.00$5,109,431.00$4,144,748.00$5,109,431.00
6596-7.03%$0.00$0.00$0.00$362,272.00$3,886,011.00$4,815,143.00$3,886,011.00$4,815,143.00
669727.25%$0.00$0.00$0.00$369,518.00$3,590,970.00$4,492,588.00$3,590,970.00$4,492,588.00
6798-6.56%$0.00$0.00$0.00$376,908.00$3,255,426.00$4,139,650.00$3,255,426.00$4,139,650.00
689926.31%$0.00$0.00$0.00$384,446.00$2,895,148.00$3,749,520.00$2,895,148.00$3,749,520.00
691004.46%$0.00$0.00$0.00$392,135.00$2,500,966.00$3,318,782.00$2,500,966.00$3,318,782.00


In this scenario, the combined value of his investments is about $5,000,000, same as in the second scenario above. And… Tim’s investment account is depleted at age 87, but his life insurance picks up the slack, giving him an income out to age 100, and beyond (if he lives that long).

A better option might be to only take money from his life insurance policy when he needs it, like this:

YRAGEHYPOTHETICAL MARKET RETURNINVESTMENT ACCOUNT PRE-TAX WITHDRAWALINVESTMENT ACCOUNT AFTER TAX NET INCOMEEND OF YEAR BALANCEINCOME FROM LIFE INSURANCENET CASH VALUE OF INSURANCENET DEATH BENEFIT OF INSURANCETOTAL INVESTMENT + INSURANCE CASH VALUETOTAL INVESTMENT + INSURANCE NET DEATH BENEFIT
366727.25%$300,000.00$204,000.00$3,435,750.00$0.00$1,842,379.00$3,582,799.00$5,278,129.00$7,018,549.00
3768-6.56%$306,000.00$208,080.00$2,924,438.00$0.00$1,950,645.00$3,694,287.00$4,875,084.00$6,618,725.00
386926.31%$0.00$0.00$3,693,858.00$212,242.00$1,840,175.00$3,395,339.00$5,534,033.00$7,089,198.00
39704.46%$318,362.00$216,486.00$3,526,043.00$0.00$1,947,448.00$3,502,154.00$5,473,491.00$7,028,197.00
40717.06%$324,730.00$220,816.00$3,427,326.00$0.00$2,060,429.00$3,612,864.00$5,487,755.00$7,040,190.00
4172-1.54%$331,224.00$225,232.00$3,048,422.00$0.00$2,179,366.00$3,727,713.00$5,227,788.00$6,776,135.00
427334.11%$0.00$0.00$4,088,238.00$229,737.00$2,061,543.00$3,441,445.00$6,149,781.00$7,529,684.00
437420.26%$344,606.00$234,332.00$4,502,093.00$0.00$2,179,216.00$3,552,225.00$6,681,309.00$8,054,317.00
447531.01%$351,498.00$239,019.00$5,437,694.00$0.00$2,302,866.00$3,667,225.00$7,740,560.00$9,104,919.00
457626.67%$358,528.00$243,799.00$6,433,780.00$0.00$2,432,761.00$3,786,656.00$8,866,541.00$10,220,436.00
467719.53%$365,698.00$248,675.00$7,253,178.00$0.00$2,568,875.00$3,910,448.00$9,822,054.00$11,163,626.00
4778-10.14%$373,012.00$253,648.00$6,182,517.00$0.00$2,711,381.00$4,038,552.00$8,893,898.00$10,221,069.00
4879-13.04%$0.00$0.00$5,376,317.00$258,721.00$2,586,811.00$3,826,845.00$7,963,128.00$9,203,162.00
4980-23.37%$0.00$0.00$4,119,872.00$263,896.00$2,446,893.00$3,668,496.00$6,566,765.00$7,788,368.00
508126.38%$0.00$0.00$5,206,694.00$269,174.00$2,290,156.00$3,489,833.00$7,496,850.00$8,696,527.00
51828.99%$403,761.00$274,557.00$5,234,717.00$0.00$2,406,346.00$3,581,841.00$7,641,063.00$8,816,558.00
52833.00%$411,836.00$280,048.00$4,967,568.00$0.00$2,526,443.00$3,677,457.00$7,494,011.00$8,645,025.00
538413.62%$420,072.00$285,649.00$5,166,864.00$0.00$2,650,669.00$3,776,468.00$7,817,533.00$8,943,332.00
54853.53%$428,474.00$291,362.00$4,905,655.00$0.00$2,778,739.00$3,878,550.00$7,684,395.00$8,784,206.00
5586-38.49%$437,043.00$297,189.00$2,748,643.00$0.00$2,909,425.00$3,982,746.00$5,658,068.00$6,731,389.00
568723.45%$0.00$0.00$3,393,200.00$303,133.00$2,722,004.00$3,766,562.00$6,115,204.00$7,159,762.00
578812.78%$454,700.00$309,196.00$3,314,041.00$0.00$2,839,242.00$3,854,881.00$6,153,282.00$7,168,922.00
58890.00%$463,794.00$315,380.00$2,850,247.00$0.00$2,957,465.00$3,945,495.00$5,807,712.00$6,795,741.00
599013.41%$473,070.00$321,687.00$2,695,956.00$0.00$3,076,190.00$4,037,988.00$5,772,146.00$6,733,944.00
609129.60%$482,531.00$328,121.00$2,868,599.00$0.00$3,195,356.00$4,130,699.00$6,063,955.00$6,999,298.00
619211.39%$492,182.00$334,684.00$2,647,091.00$0.00$3,320,782.00$4,222,460.00$5,967,873.00$6,869,551.00
6293-0.73%$502,025.00$341,377.00$2,129,407.00$0.00$3,448,672.00$4,312,755.00$5,578,079.00$6,442,161.00
63949.54%$0.00$0.00$2,332,552.00$348,205.00$3,205,798.00$4,031,887.00$5,538,350.00$6,364,439.00
649519.42%$522,307.00$355,169.00$2,161,794.00$0.00$3,306,717.00$4,096,754.00$5,468,511.00$6,258,548.00
6596-7.03%$532,753.00$362,272.00$1,514,519.00$0.00$3,404,275.00$4,165,073.00$4,918,794.00$5,679,592.00
669727.25%$0.00$0.00$1,927,226.00$369,518.00$3,105,172.00$3,843,736.00$5,032,398.00$5,770,962.00
6798-6.56%$554,277.00$376,908.00$1,282,884.00$0.00$3,167,834.00$3,892,355.00$4,450,718.00$5,175,238.00
689926.31%$0.00$0.00$1,620,411.00$384,446.00$2,829,374.00$3,530,024.00$4,449,785.00$5,150,434.00
691004.46%$576,669.00$392,135.00$1,090,292.00$0.00$2,874,981.00$3,546,147.00$3,965,273.00$4,636,439.00


In this scenario, Tim draws income from his life insurance policy the year after he suffers any kind of loss in his investments. For example, at the beginning of the second year, Tim withdraws $306,000 in income for the year. But, by the end of the year, he suffers a loss of 6.56% on his investments. Rather than continuing to make withdrawals the following year, he borrows against his life insurance policy. 

Why do this? 

Because... withdrawing money after suffering an investment loss both compounds the loss and locks in those losses, forever. That's a very unwise move. 

By using his life insurance policy to "buffer" the loss, his investments recover, he pays back his life insurance policy and makes a withdrawal from his investment account for income.

What this does is allows him to recover and “bounce back” in his investments, thus reducing the risk of him running out of money. Investments generally perform best when investors do not cash them out, and this is especially true when those investments are losing money. Drawing income from his retirement account after a losing year is the worst possible mistake Tim could make… a mistake Tim can avoid by using his whole life insurance policy.

And, if Tim does not spend all his savings before he dies, his life insurance policy pays a death benefit to his heirs which is many times the value of his investments, effectively allowing his heirs to recover most of the savings he spent during his lifetime.

Best of all, both the death benefit and the income from his whole life insurance policy aren’t subject to any income tax as long as he follows a few simple rules. It’s not even reportable to the IRS — something Tim really likes. It uncomplicates an otherwise complicated (and common) tax planning problem.

By strategically using his whole life insurance policy to offset losses in his retirement plan, Tim can potentially increase his income each year, adjusted for inflation, and never run out of money. What’s more, Tim’s overall investment strategy performs much better than if he had not bought the insurance.

Of course, we can never know how the investments in Tim’s retirement plan will play out in the future. We also can’t know what future life insurance dividends will be. Maybe he does better than expected. Maybe worse.

But, in principle, the idea is the same. Even if Tim only received the basic guarantees promised by his life insurance company, his whole life insurance policy removes a lot of uncertainty and risk from his life and replaces it with more certainty and stability.

What's Next?

If you want a deeper understanding of how whole life insurance can protect your nest egg, please join the daily email list and get the 7 Unbeatable Advantages for building more financial security.