Using the Value in Life Insurance Policies to Manage Retirement Risk


For anyone who relies on an investment portfolio for a significant amount of their retirement income, volatility control is critical to ensuring that the portfolio will survive a long retirement.  On average, a retiree will experience 5 down years in the market during any given 20 year period.  As those who retired in the mid 2000’s can attest, experiencing one or more down markets early in retirement can be devastating to the long term viability of a retirement plan and corresponding investment portfolio.  To fund cash needs during a down market, a retiree is often forced to sell investments at depressed prices, which permanently reduces a portfolio’s ability to recover value when the market reverses course.  To reduce the impact of a temporary market decline, Legacy Trust recommends that a well-structured retirement portfolio include sufficient stable investments to cover several years of cash needs.  A seasoned life insurance policy can sometimes be a good source for some of this risk reducing liquidity.

The accrued cash value of a permanent life insurance policy purchased to protect a young family can grow to become a significant asset and an important risk protection tool in retirement.  Although the traditional death benefit may be less important by the time retirement arrives, the cash value can be a stable and reliable source of liquidity, especially when markets are down.  With many policies, this value can be realized through tax free withdrawals (or loans) and when carefully planned they will reduce the need to realize cash from the investment portfolio.  This avoids the need to sell assets when values are down and provides a better opportunity for the portfolio to recover its value as the markets improve.  Since the withdrawals are often structured to be tax free, fewer assets are consumed when taking advantage of the life insurance.

Having the availability of a non-volatile asset that can be utilized during periods of market decline may provide some retirees the comfort to pursue a more aggressive investment policy, eventually extending the life of their portfolio.  It may also provide the comfort to spend a higher percentage of their investment assets each year to enhance lifestyle.  Or, it may simply provide comfort knowing that they are in a better position to absorb unexpected expenses, including healthcare costs, along with the occasional market decline.

Life insurance policies should be reviewed regularly to ensure that they are utilized effectively throughout the owner’s lifetime.  Although their original purpose may become less important, they may still be a very valuable asset.  Utilizing the cash value during periods of market decline is only one way to capitalize on this value.  There are others that may apply.  Legacy Trust would be happy to help you develop a long term retirement plan, as well as a strategy to maximize the value of the life insurance policies you have invested in over the years.