5 Reasons Why Keeping your Life Insurance Can Help in Your Retirement Years

Photo by Wes Battoclette

A sound retirement plan requires a diverse financial plan to ensure you achieve your goals and attain financial security. Understanding the advantages of using life insurance in a plan can add one more option for ensuring that path to financial security. 

1. Life insurance can help replace lost Social Security income/pension income. With an average Social Security benefit of $1,2941 per month for retirees, the passing of a spouse has a major impact on cumulative monthly benefits of a retired couple. When one spouse passes away, they are eligible for their spouses Social Security or their own, whichever is higher. It is a system that ensures that the higher benefit of the two continues, but inevitably leads to a substantial loss of cumulative monthly benefits. Having life insurance in retirement can help provide a source of income due to the loss of Social Security income or the loss of pension income resulting from a spouse’s death.

2. Tax bracket arbitrage and flexibility. As long as we have a bracketed system for income taxes, there are substantial opportunities to create distribution plans in retirement that keep you in a lower tax bracket. Traditional 401k and IRA withdrawals are taxed as ordinary income as are most pension benefits and for some, the majority of Social Security is also taxable. Life insurance withdrawals up to the cost basis (total of cumulative premiums) and/or policy loans are not treated as income and thus can generally be received tax free2

Currently couples can receive up to $74,900 of income and remain in the 15percent tax bracket; as well as remain in the 0percent capital gains bracket. The addition of assets in your portfolio like the Roth IRA or cash value insurance can add substantial flexibility and can keep your IRA withdrawals in a lower tax bracket by diversifying the types of assets you are using to provide needed income. This type of tax diversification can also help ensure your capital gains do not get taxed as well. In this way, Roth IRA’s and cash value insurance can actually make IRAs, 401ks, and taxable investment accounts more efficient by utilizing multiple sources to create a retirement income stream. A tax efficient portfolio should include tax diversification that allows for some assets to be taxed as capital gains, some assets to be taxed as ordinary income, and some assets to be tax free. This would lead to a retirement with a lot of tax flexibility. This is especially helpful in the active years of retirement where income needs may push affluent clients into a higher tax bracket if they were not appropriately tax diversified. 

3. Provides a buffer for uncertainty in down market years with relatively liquid cash value (can help prevent equity liquidation in a down market). We’ve all heard of the power of dollar cost averaging and its positive impact on a portfolio. In retirement, distributions are needed to create income for the retiree. Distributions are the opposite of dollar cost averaging and can be catastrophic when income is needed in a down stock market. Traditional cash value insurance is an asset that does not have principal volatility and thus is a great asset to use for income in years where stock market conditions are unfavorable2.  

4. Provides a backfill for long term care (LTC) costs (either premium or actual cost). Most of us have had some experience with long term care whether it was a family member or a friend. In fact, according to the U.S. Department of Health and Human Services, nearly 70percent of people age 65 will need care3. Long term care is one of the likeliest culprits in net worth destruction for today’s retiree. Life insurance proceeds can be used to pay back the estate or family to backfill the losses that can come from long term care expenses. 

5. Fulfillment of legacy goals. Many retirees have an internal conflict in retirement and are trying to balance the goals of retirement lifestyle needs as well as legacy goals for family and or charity. Life insurance can be a nice asset that allows the freedom to spend down a portfolio with confidence knowing that legacy goals will be taken care of by the death benefit. This allows for a sense of freedom in retirement. In addition, life insurance can ensure legacy is protected for those subject to estate tax because appropriately designed trusts can shield death benefits from estate tax. 

Northwestern Mutual is the marketing name for The Northwestern Mutual Life Insurance Company, Milwaukee, WI (NM) (life and disability insurance, annuities) and its subsidiaries. Joseph B Beshear is a Representative of Northwestern Mutual Wealth Management Company® (NMWMC), Milwaukee, WI (investment management, trust services, and fee-based financial planning), a subsidiary of NM and limited purpose federal savings bank. All NMWMC products and services are offered only by properly credentialed Representatives who operate from agency offices of NMWMC. Representative is an Insurance Agent of NM and Northwestern Long Term Care Insurance Company, Milwaukee, WI, (long-term care insurance) a subsidiary of NM, and a Registered Representative of Northwestern Mutual Investment Services, LLC (NMIS) (securities), a subsidiary of NM, registered investment adviser, broker-dealer and member FINRA (www.finra.org) and SIPC (www.sipc.org). Representative may also be an Investment Advisor Representative of NMIS.


1 http://www.ssa.gov/news/press/basicfact.html

2 Loans taken against a life insurance policy, surrendered values, or withdrawn values can have potentially adverse effects if not managed properly. The death benefit will be reduced by any outstanding loans, surrendered values, or withdrawn values. Assumes a non-Modified Endowment Contract (MEC).

3 http://longtermcare.gov/the-basics/how-much-care-will-you-need/