The Relativity of Risk

The Far Reach Of Protection

Ways life insurance closes the retirement income gap

by Ray Caucci

As our average life expectancy grows and healthcare costs skyrocket, Americans should take some time to revisit their income needs in retirement.

The Centers for Medicare and Medicaid Services estimates Americans spent approximately $3.3 trillion on healthcare-related expenses in 2016, or about $10,348 per person. Not to mention, advances in modern medicine are keeping individuals alive longer than ever before. And as individuals live longer, their health care costs concurrently rise. In retirement, some estimates are predicting that 65-year-old couples will incur approximately $240,000 of out-of-pocket expenses for health care for the remainder of their lives.

Your clients will need your help to account for these rising costs as they create plans for their income needs in retirement. As your clients live longer and longer, it’s possible that an income gap may appear if the distributions from their investments and retirement savings cannot cover the remaining expenses after Social Security is taken into account.

When it comes to building a source of income that can be used in retirement there is one product that is too often overlooked: life insurance. Life insurance has traditionally been solely viewed as a vehicle for protection against a premature death. It is also typically seen as an expensive option reserved for the ultra-high net worth. However, these are common misconceptions among consumers and even their financial advisers. Permanent life insurance allows policyholders to accumulate cash value that can be used in retirement, which can come in handy should a client experience a cash shortfall. Also, starting early while young and still healthy can make permanent life insurance policies more affordable.

I believe that life insurance should be at the center of any strong financial plan. But first, financial advisers must become more knowledgeable about the benefits of life insurance in saving for retirement. Here are just a few considerations to keep in mind about life insurance products when building retirement income plans for clients:

Living benefits offer a growing cash pile

Financial advisers and consumers typically focus solely on the protection life insurance provides family members and loved ones in the event of an untimely death. However, many do not realize the living benefits of a permanent life insurance policy that simultaneously allow the policyholder to build up cash value on a tax deferred basis.

As long as the policyholder pays their premiums in full and maintains the policy throughout the course of their lives, this cash value is available for use in a number of different manners. The policyholder can make withdrawals from the policy or take out a loan against it while still in their working years. Life insurance policies also typically offer long-term care and chronic illness riders that add another source of liquidity to the policy. Once in retirement, the cash value of the policy is available for the policyholder to use as a supplement to their other sources of income.

Smarter way to liquidate during market downturns

As your clients live longer and longer, it’s possible that an income gap may appear if the distributions from their investments and retirement savings cannot cover the remaining expenses after Social Security is taken into account

The stock market has served investors very well throughout the last several years. Because of this, it’s easy for your clients to forget that volatility will rear its ugly head at some point during the future. If this happens during their retirement years, it could result in a situation that may leave your clients worried about having enough funds to last the rest of their retirement.

The cash saved in a permanent life insurance policy provides a much needed safety net in the event that a financial downturn meaningfully deteriorates the value of your clients’ portfolio in retirement. For instance, if one client has $2 million invested in equities, and the stock market falls 15 percent, this client could potentially see $300,000 of their hard earned savings vanish overnight. However, financial markets typically recover over time. So instead of accessing income from their investment portfolios after a market downturn (“selling low”), retirees can instead draw from the cash value of their life insurance plan, which can be less impacted during market downturns, while their investments take the time needed to heal.

Much easier than acquiring a bank loan

If your clients find themselves needing fast access to liquidity in retirement, tapping into the cash value of their life insurance policy offers a much more convenient and cost effective option than applying for a personal bank loan. Receiving approval for a bank loan can take weeks. Not to mention, depending on their credit score, a $5,000 personal bank loan can charge anywhere between 7 and 31 percent interest for your clients. Obviously, bank loans are not ideal options for your clients passed their earning years that could find themselves trapped in a revolving door of debt.

Tapping into the cash value of a permanent life insurance plan offers your clients a much better option in emergency scenarios. As mentioned above, the policyholder has a number of options in how to go about doing so, including taking out a loan or a withdrawal, among others. This is typically a relatively painless process considering the cash value is money already accessible to the policyholder.   

Evolve the conversation

Advisers must take charge by changing the conversation around life insurance to one that includes the comprehensive suite of living benefits permanent life insurance policies can offer. But before that, advisers need to become more educated on these benefits and how they can fit into their clients’ financial plans during their earning years as well as in retirement. These products have too much to offer American consumers, but are still often overlooked as a single-use tool. As an industry dedicated to producing positive financial outcomes for our clients and their loved ones, we must do more to put permanent life insurance coverage in the hands of more individuals. ◊

Mr. Caucci is senior vice president, Product Management, Underwriting, and Advanced Markets for Penn Mutual. Visit