Income Planning

Retirement Distribution Planning

Can life insurance help boost your income withdrawal rate?

by Jay Weyers, CFP

Mr. Weyers is a Registered Representative and Investment Adviser Representative of Equity Services, Inc. Securities and investment advisory services are offered solely by Equity Services, Inc., Member FINRA/SIPC, 123 N. Wacker Drive, Suite 600, Chicago, IL 60606, (312) 236-2500. Weyers McKeever Financial Partners is independent of Equity Services, Inc. Visit

Planning for retirement is one continuous journey. It is a myriad of strategies and decisions that need to be made to help you not only accumulate enough savings for retirement, but have those savings carry you through retirement. At some point, you will be leaving the familiarity of a regular paycheck and living off the assets you’ve saved, which means there needs to be some degree of regularity in your investment portfolio. Your spending habits may change, which directly ties to the percentage of your assets you can take each year from your portfolio in retirement.

Retirement planning also hinges on the rate of return your portfolio continues to attain in retirement. You will have to consider economic and market conditions, taxes, budgeting, spending, Medicare premiums, health-related factors and whether you will continue working on a part-time basis. Having assets that serve different purposes during both the accumulation and distribution phase of retirement is critical and will vary based on an individual’s unique needs and circumstances.

Planning Around Different Tax-Structures

During the accumulation phase, where you lay the foundation for a retirement portfolio, there are a range of well-known investment options such as 401(k)s, 403(b)s, traditional and Roth IRAs, stocks, mutual funds and other vehicles designed for business owners, to name a few.

The challenge is that these products have different tax structures that need to be balanced during both the accumulation and distribution phase and most are susceptible to market conditions and rates of return. Some have income restrictions that make it difficult for high-net worth or highly compensated individuals to fully contribute. Using a strategy that employs rate of return focused assets in conjunction with actuarial-based products, such as permanent life insurance, may enable you to accomplish four key wealth and retirement building objectives:

  • Building your assets while managing your risk
  • Supporting your lifestyle in retirement
  • Passing on your wealth or estate to your chosen beneficiaries the way you want
  • Have a retirement plan that can be managed amidst changing circumstances

You have to start with the end in mind. This means determining how different income streams will work across your various assets in retirement and which assets to tap, and when to tap them, for income. This is where actuarial-based products such as permanent life insurance can not only help protect your assets in the event of an untimely death, but may also provide a supplemental income stream when needed that could allow you to increase your withdrawal rate from your retirement assets during times of need.

Using permanent life insurance in retirement planning is a process whereby supplemental retirement cash needs can be accomplished through policy loans and withdrawals from the cash value of the policy. Since most traditional retirement investments are fully taxable or tax-deferred, a client will pay taxes each year they have gains on their fully-taxable assets (i.e., stocks) or the asset is tax-deferred and the taxes on gains and income are paid when they withdraw the income (i.e., 401(k)s). Since life insurance is generally taxed on a first-in, first-out basis, tax-free withdrawals could be made up to your basis in the policy.1 Policy loans and withdrawals reduce the policy’s cash value and death benefit and may result in a taxable event.

This strategy is designed to help provide a supplemental income source which could increase the amount you may be able to draw during retirement, particularly if your investment savings are affected by periods of volatility or heavy taxation...

Except in the case of a Modified Endowment Contract (MEC), withdrawals up to the basis paid into the contract and loans thereafter will not create an immediate taxable event, but substantial tax ramifications could result upon contract lapse or surrender. For MECs, policy loans and withdrawals are considered withdrawals and treated as taxable income to the extent there is gain in the policy and may also be subject to a 10% penalty for early withdrawals. Surrender chargers may reduce the policy’s cash value in early years.

A Supplemental Income Source

This strategy is designed to help provide a supplemental income source which could increase the amount you may be able to draw during retirement, particularly if your investment savings are affected by periods of volatility or heavy taxation. However, there are many variables that need to be considered to determine if this strategy is suitable for a client. Most importantly, if the policy is incorrectly overfunded, this could result in the policy being classified as a Modified Endowment Contract (MEC), and if that happens, the policy will be subject to last-in, first-out tax treatments on policy distributions, meaning that gain is treated as received first. Also, loans will be considered distributions.

As with all cash value type insurance that allows policy loans, if the policy lapses or is terminated while loans are outstanding, the amount of the loan may be taxed to the insured.

This type of supplemental income strategy most often uses universal life-style insurance policies that are designed for growth in cash value by overfunding the policy. As such, this strategy is not appropriate for individuals who are already in retirement or soon to retire; it is more appropriate for candidates who are young enough to help fund the policy for 10 to 15 years or more and can absorb the additional mortality and expense charges that occur in the upfront years of the policy.

For clients who are somewhat restricted from contributing to traditional retirement savings plans due to income contribution limits, this strategy can provide more flexibility in their savings and income withdrawal strategy. Having permanent life insurance designed for cash value in retirement years could enable a client to take a higher overall distribution rate from their existing portfolio at different times when needed. The cash value in the life insurance can be withdrawn for income in years when the market is down, and withdrawals can be suspended from the portfolio if not needed at that time. This could allow a client’s distribution rate to be increased from 3% to 4% or 6% or higher depending on the client’s situation.

Although permanent life insurance does not provide the higher rates of return that can be found with traditional investment vehicles, the actuarial structure of permanent life insurance can provide a floor of returns that can help offset periods of market loss in an overall investment portfolio, thus potentially increasing the amount of tax-free income you could withdraw from a portfolio in a given year, up to your basis in the policy. In the event of an untimely death, the remaining available death benefit in the policy after loans or withdrawals could be used as tax-free income to your beneficiaries.
Depending on the client’s situation, using this strategy could increase a client’s retirement income, decrease some of their risk, and provide more certainty in their estate and legacy planning. ◊



1Internal Revenue Code 101(a)(1). There are some exceptions to this rule.
It is not Jay Weyers’s position to offer tax advice. You should seek the advice of a qualified tax professional regarding your own personal situation. TC103812(0918)1