Life Insurance as a Retirement Plan - Good Idea?

Is using a life insurance policy for supplemental retirement income a good idea?

Some life insurance companies are now marketing the ability to use the cash value in a life insurance policy to create supplemental retirement income. First, we will take a look a who says NO to this idea and who is saying YES to the strategy.

Who thinks this is a bad idea?

As expected, those who think this is always a bad idea are the "market guys". They subscribe to the theory that "buy term and invest the difference" is always going to beat growing cash within an insurance policy.

Motives are a key factor in beliefs. If an advisor's business model is based on collecting a percentage of your assets that they manage, they would make less money if you are putting money away elsewhere.

It's not exactly fair to say income is their only motive (although that line is routinely used against insurance agents.) Many advisors will boast that they are being fiduciaries - that they have to act in your best interest - but still it comes down to their beliefs. You could more fairly frame the argument as believers in the market.

Who thinks this is a great idea?

Not surprisingly, insurance agents take the opposite view. They think life insurance is a great place to grow money to be used in retirement. There are two particular camps on this side of the debate. When they aren't arguing with the "market guys", they argue with each other.

Whole Life - Some agents exclusively sell whole life as their go-to cash value life insurance product. Traditionally designed whole life policies put most of the policy's premiums toward the death benefit and little towards the cash value. There is a growing segment of whole life advisors who are willing to design the policy to maximize cash value, however this reduces the commission that they will get paid. Several books discuss whole life policies, including Becoming Your Own Bank, Bank on Yourself, and Money. Wealth. Life Insurance. If you find any articles trying to scare you away from Indexed Universal Life, they are probably trying to convince you that whole life is a better option (or that cash value life insurance in general is a bad idea.)

Indexed Life - Proponents of indexed life generally don't believe the whole life line. The draw of indexed life is that your cash value can grow during the "good" years in the market, but never lose value in the "bad" years. (In contrast, whole life policies usually grow some every year through declared policy dividends.)

When comparing whole life and indexed universal life, those who favor indexed life believe that the potential for growth is higher when you can match gains with the stock market. Whole life agents will counter that their policies will (most likely) never stick you with 0% interest in any given year - that you'll always get some growth.

A Happy Medium

Whole life is probably considered the "safest" option when it comes to growing your money. Several insurers have 100+ year track record of paying policy dividends through booms, busts, and turmoil.

On the other end of the spectrum is full stock market exposure through stocks, mutual funds, bond funds, or ETFs. While the potential for gain in any one year is the highest with this approach, you also have a good chance of sustaining significant losses. The S&P 500 declined -46% from 1999-2001 and -53% from 2007-2009.

Maximum Drawdown of the S&P 500

Maximum Drawdown of the S&P 500


In the middle of these options lies Indexed Universal Life. Again, your interest is credited according to the performance of a market index (e.g. the S&P 500), but your money is not actually invested in the market, so it is not subject to the wild swings.

With Indexed Life, you will probably do several percentage points better than Whole Life, while it is possible that you might lag the market strategy by a few points. However, not having to worry about market cycles and timing can have you come out ahead, especially if the next 15 years look similar to the past 15 years.


High cash value life insurance CAN be a good option to grow money for supplemental retirement income. Tax-wise, the benefits are similar to a Roth IRA, but you don't have any restrictions on the amount you can save, and no phase-outs of eligibility if your income is high.

Product choice and product design are the two biggest factors for success. Your advisor has to be willing to take a serious pay cut to maximize the cash value. They also have to have access to the best policies and be trained on how the products work. Less than 1% of life insurance agents can meet this criteria.

Also, everything doesn't have to be yes or no. It is possible to be invested in the stock market while managing the investments in a way that protects from huge losses. This is also something that we offer.

If you are looking at an Indexed Universal Life or Whole Policy being pitched for retirement income, perhaps you would like a free, unbiased second opinion. If you have something great, we will gladly let you know. If there are better alternatives, we can have that discussion too if you are interested.