Withstand Market Volatility in Retirement with Life Insurance Cash Value
November 10, 2015 | Your Finances
One of the biggest threats to financial security in retirement is market volatility. Even if you’ve saved and invested diligently throughout life, a poorly timed downturn in the market can have a devastating impact on your retirement nest egg. It’s a risk that became all too real for people who retired following the recession of 2008 and 2009 with retirement accounts that had plummeted in value.
You can’t control ups and downs of the market, but you can reduce the impact of market volatility by having other sources of income available to you during a downturn, such as the cash value of life insurance.
In addition to protection offered by the death benefit, permanent (whole) life insurance policies build equity—or cash value—over time, which grows tax deferred and becomes a source of funding you can access at any time and for any reason. And with whole life insurance, your cash value is not subject to the ups and downs of the market. It never loses value, guaranteed. Policy owners commonly use cash value to fund the down payment on a home, launch a business or pay for a child’s college. But it can also be used to supplement retirement income, particularly during a down market.
“This can be especially valuable for individuals who are taking systematic withdrawals from a tax-qualified account like a 401(k),” said Greg Balian, Northwestern Mutual regional director of financial planning. “Having access to another source of funds in years when the market is down provides greater flexibility to weather the storm and the ability for the funds to rebound before withdrawing again.”
How much of a difference can it make? In this excerpt from our most recent webcast, A Powerful Asset: 5 Benefits of Life Insurance While You’re Living, Balian uses a hypothetical example to illustrate the impact of a market downturn on retirement income and how the impact can be minimized using life insurance cash value.
To view the entire webcast, click here.
Each method of utilizing your policy’s cash value has advantages and disadvantages and is subject to different tax consequences. Surrenders of, withdrawals from and loans against a policy will reduce the policy’s cash surrender value and death benefit and may also affect any dividends paid on the policy. As a general rule, surrenders and withdrawals are taxable to the extent they exceed the cost basis of the policy, while loans are not taxable when taken.
Loans taken against a life insurance policy can have adverse effects if not managed properly. Policy loans and automatic premium loans, including any accrued interest, must be repaid in cash or from policy values upon policy termination or the death of the insured. Repayment of loans from policy values (other than death proceeds) can potentially trigger a significant tax liability, and there may be little or no cash value remaining in the policy to pay the tax. If loans equal or exceed the cash value, the policy will terminate if additional cash payments are not made.
Policyowners should consult with their tax advisors about the potential impact of any surrenders, withdrawals or loans.