Is Whole Life Insurance Good for Retirement Savings?

Thang Truong
Thang Truong
Updated on:

Insurance agents often tout the benefits of whole life insurance. They extoll the virtues of the cash value accumulation, from which you can withdraw money to supplement retirement income. One thing some people overlook is that insurance agents work on commission, and whole life insurance is expensive. Are they recommending whole life insurance because it’s the best policy for you, or because they have their eyes on the handsome commissions they will earn if you purchase whole life?

We examine a case study to find out whether whole life insurance is good for retirement savings, or whether another policy might work better. 

How Much can You Save for Retirement in a Whole Life Policy?

Moon is a 37- year old female. She works as a manicurist in a nail salon and earns between $40,000 and $50,000 a year. Lucky for Moon, she is in excellent health. Her goal is to be able to supplement her retirement income when she retires at age 60 from a permanent life insurance policy. She wants to benefit from tax-deferred growth and tax-free withdrawal advantages of the cash value in permanent life insurance policy.

She purchased a whole life insurance policy from Mass Mutual four years ago.

The face value of the policy is 200,000 and she pays $220 a month or 2,640.00 annually. She will pay this fee for 27 years old until she reaches age 60. After that, based on the current policy illustration, the maximum annual distribution will be $6,431 for 30 years from 61 to 90 years old. The premiums for pure insurance cost can be paid from the accumulated cash value when Moon turns 61.

The accumulated cash value (assuming the reinvesting of dividends) by age 60 is $112,739. This sounds pretty good; However, the maximum cash distribution of $6,431 a year is not a lot of money to supplement retirement. Are there are other policies Moon should consider?

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Indexed Universal Life Insurance is Usually Better for Retirement Savings

After shopping around with 30+ carriers and comparing their 90+ permanent life insurance products, we found a better product for Moon. We advised her to switch to an Indexed Universal Life policy from Allianz Life (Life Pro+ Advantage product). She will still pay $2,640 a year. However, she only needs to pay the premium for 23 years only.

With this policy, she will be able to withdraw $13,456 a year tax-free for 30 years, from ages 61 to age 90 based on the illustration of the policy. If she passes away at age 90, her beneficiaries will receive a $38,000 death benefit, also tax-free. 

Allianz’s IUL product gives Moon the ability to supplement her retirement income with a little over twice as much of an annual distribution for less premiums. Below is side-by-side comparison of the two policies to illustrate how much better Allianz’s IUL product is in delivering the benefits Moon is looking for.

MassMutual Whole LifeAllianz Life (Pro+Advantage) – an IUL product Why is Allianz’s IUL product better for Moon? 
Premium $2,640 a year or $220 a month$2,640 a year or $220 a monthSame
Premium period27 years 23 years 4 years less premiums
Non-guaranteed cash value at age 60$112,739$161,516$48,777  more cash value
Non-guaranteed annual distributions (withdrawal or loan) for 30 years from 61-90 years old $6,431$13,456More than double annual distribution amount for 30 years
Non-guaranteed accumulative distributions of 30 years$192,930$403,680She will receive $210,750 more in cash distribution for 30 years from Allianz’s IUL product 
Non-guaranteed death benefit at age 91$74,900$38,217Allianz’s IUL product offers less death benefit at age 91. However, her goal is not death benefit; her goal is to maximize cash distribution to supplement her retirement income.

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>>MORE: How to Use Life Insurance in Retirement Planning? A Case Study

Is Whole Life Insurance Good for Retirement Savings?

It is clearly evident that whole life insurance isn’t really a good option if you are looking to supplement retirement income, as Moon is. Indexed Universal life can accumulate cash value much faster, albeit with more risk. 

If leaving money to beneficiaries is your main concern, whole life insurance might work for you. Moon would leave her heirs with a $78,316 tax-free death benefit: more, if she pays the premiums past age 60. This is a little over twice as much as the indexed universal life policy leaves them, even if she never pays another cent in premiums. 

>>MORE: Is Whole Life Insurance Really Worth It? A Case Study

How does Whole Life Insurance and Indexed Universal Life Insurance Compare?

Indexed Universal Life insurance accumulates cash value (as does Whole life). Both are permanent life insurance policies, meaning they will last your entire life (as long as you pay the premiums, or wait until you have enough cash value to pay them). 

Whole life insurance is relatively simple. You have a guaranteed death benefit, and there is a savings account attached to accumulate cash value in a whole life policy. This savings account grows at a slow-but-predictable rate, generally 2-2.5%. If your policy is held by a mutual company, there is the potential to earn dividends, which you can reinvest into the policy, pay premiums, or take in cash.

If you reinvest the dividends back into the policy, you can accumulate cash value faster. This is called non-guaranteed cash value, because you could either take the dividends in cash or use them to pay a portion of the premiums. If you take the dividends in cash, the cash value you are left with is called the guaranteed value, because that is the amount you are guaranteed to earn.

Indexed Universal Life accumulates cash value through investments that reflect the market as a whole. You’re not invested in the market, per se, but you earn interest based on market performance as reflected by an index. Common indexes are the Dow Jones Industrial Average, the S&P 500, and the Nasdaq Composite.

Since you’re not investing directly in the market, you won’t lose money if the market suffers a downturn. There is usually a predetermined interest rate that is the lowest you can earn (typically 0 or 1%). Even if the market loses money, you won’t lose any money. On the other hand, there is also usually a cap on how much you can earn. For example, if the cap on your account is 8% and the market performs well and earns 11%, you still earn 8%. 

There is more risk involved with an indexed universal life policy, but it has the potential to earn significantly more cash value. Since Moon is in excellent health, she can tolerate more risk, as long term investments make money over time. Since Moon will be holding onto the account for at least ten years, she can assume more risk.

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Final Thoughts

If Moon wants to supplement her retirement income, as she states, she is much better off with the IUL policy. This policy allows her almost $13,500 cash disbursement every year from ages 61 onward. That’s about $1,125 a month, and her heirs still get a death benefit. Combined with Social Security income, Moon has enough to live on through retirement. 

On the other hand, the whole life policy only provides Moon with $6,431 annually, or about $536 a month. Even with Social Security benefits (which are reduced if Moon starts taking them at age 62) Moon will struggle to pay bills and live a comfortable retirement. 

In this case, Moon is much better off with the IUL policy. 

Thang Truong

Thang Truong covers small business insurance and small business success at BravoPolicy. He is a licensed P&C insurance agent. Previously, he held product leadership positions at, Capital One, NerdWallet, and Mulberry Technology. He holds a MBA degree from UC Berkeley - Haas School of Business.

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