Life Insurance in Retirement

Sean McGinn is assistant director of risk product positioning at Northwestern Mutual

A lot changes once the kids move out and the house is paid off. Some of your biggest financial obligations are now behind you. If you have life insurance, it might seem like you no longer need your coverage. But life insurance—specifically permanent life insurance—likely still has an important role to play as you approach retirement. In fact, retirement is often the time when you will most significantly realize the long-term value that you get from permanent life insurance. 

The value of permanent life insurance in your retirement planning

With its guaranteed death benefit that won’t expire and tax-advantaged cash value that you can access at any time (after a period of accumulation) for any reason, permanent life insurance can help you with a number of major financial goals in retirement. Here’s how to use permanent life insurance in retirement.

Using life insurance to weather down markets in retirement

Market-based investments are an important part of a retirement plan because they help you grow your wealth and can protect you from inflation over time. If prices rise, your investments will typically also increase in value. But market declines are also a reality of investing. If you’re forced to sell investments to continue to create income when the market falls, you may end up taking a larger chunk out of your retirement nest egg than you want.

That’s where permanent life insurance can play a major role in your retirement planning. With whole life insurance (one of the types of permanent life insurance), your cash value is guaranteed to grow from one year to the next and won’t decline with the markets. Since it’s not tied to the market, it can allow you to hang onto those market-based investments when the markets fall. Instead, you could either take cash value out of your policy (which will permanently reduce the death benefit) or simply borrow against it (which will temporarily reduce the death benefit until you pay back the loan once your investments regain value). 

Using life insurance for tax efficiency in retirement

Because of our progressive tax system, the more you earn in a given year, the larger the percentage of your additional earnings you will have to send to the IRS. This remains the case during retirement, because when you withdraw from your traditional 401(k) or IRA, you’ll owe income tax on those funds.

Let’s say you have higher-than-expected costs in a given year in retirement—like an added expense you didn’t anticipate. That means you’ll have to withdraw more from your retirement accounts to cover the expense. The larger withdrawals may put you into a higher tax bracket. If that happens, you’ll have to withdraw even more money to cover the additional tax.

Here’s an example of what we mean:

As you can see above, it’s helpful to have a mix of taxable and non-taxable sources that you can pull from in retirement. With permanent life insurance, you can withdraw the basis that you pay into the policy tax-free. After that, as long as the policy stays in place, you’re able to borrow against your cash value without owing any tax. That means in any given year, if you need to withdraw more than you expected, you can use your life insurance cash value (instead of accessing taxable sources of income) to avoid crossing into a higher tax bracket.

It’s also worth noting that the example above uses today’s tax rates. Unless Congress takes action, taxes are set to increase in 2026.

Life insurance can help ease concerns over spending down your other assets in retirement

Perhaps you want to leave something behind for your family. Or maybe you’re in a position where you need to fund care as your spouse’s health deteriorates. When you’re concerned about spending down your assets, you may find yourself making difficult choices.

Permanent life insurance can free you to spend down your assets on what’s most important to you while you’re alive—the death benefit can replenish assets for your spouse to generate income, fund your legacy or both. It’s a flexible asset to use as you need to.

Life insurance can help you create guaranteed income in retirement

If you want guaranteed income in retirement and don’t have a need for your life insurance death benefit anymore, you may be able to turn your cash value into an income plan that will pay you a guaranteed monthly amount—typically for as long as you live.

You could also do something known as a 1035 exchange for an annuity. A 1035 exchange allows you to trade one insurance policy for another without owing tax at the time you make the exchange.

Can I use term life insurance to plan for retirement?

Term life insurance differs from permanent life insurance in that it provides a death benefit only if you die within a specified timeframe (say, 10 or 20 years, or until you reach a certain age), and it does not have a cash value component. So the death benefit could help you leave something behind for your family while the death benefit is in place, but its lack of cash value doesn’t provide any living benefits for you in retirement.

Building a retirement plan that works for you

Building a diversified retirement plan will give you flexibility down the road to continue working toward your goals in retirement while adapting to whatever life throws your way. Permanent life insurance can be a flexible addition to your retirement plan, thanks to the potential its cash value offers. If you’re unsure how permanent life insurance might fit into your retirement plan, you can always connect with a Northwestern Mutual financial advisor to learn more and talk through options.

Utilizing the accumulated value through policy loans, surrenders, or cash withdrawals will reduce the death benefit and may necessitate greater outlay than anticipated and/or result in an unexpected taxable event.

CAUTION: 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 surrender, lapse or the death of the insured.  Repayment of loans from accumulated values upon surrender or lapse can trigger a potentially significant tax liability, and there may be little or no cash value remaining in the policy to pay the tax. The policy will lapse if loans become equal to the cash value while the policy is in force and additional cash payments are not made.

This publication is not intended as legal or tax advice. Financial representative