Market Volatility: How Life Insurance Can Protect Your Retirement Income

Market volatility is back. After nine consecutive years of positive returns, the S&P 500 posted a loss for 2018. The index declined nearly 7 percent, fueled in large part by an epic meltdown in the fourth quarter.1
 
If you’re approaching retirement or are recently retired, you may be concerned about volatility in the markets. You’ve worked hard to accumulate assets for retirement, and you’ll likely need them in the coming years to generate income and fund your lifestyle. A market downturn could threaten your ability to enjoy a stable and comfortable retirement.
 
There are a number of different strategies you can implement to protect yourself. However, one of your most effective options may be found in an unlikely source: life insurance.
 
Many people assume that life insurance is only for death benefit protection. It’s true that life insurance is a valuable protection tool for your spouse, children and other loved ones. However, it can also be a powerful tool for stable growth, asset protection and tax-efficient income.
 
Not sure how life insurance fits into your retirement strategy? Below are a couple of ways you can use cash value life insurance to protect your assets and help you enjoy a financially stable retirement:
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Protection from volatility and downside market risk. 
Permanent life insurance policies, such as whole life and universal life, have a cash value component. When you make a premium payment, a portion of the premium goes to the insurer to pay for the cost of the death benefit protection. However, the remainder of the premium goes into the cash value account, which grows on a tax-deferred basis over time.
 
Where does the cash value growth come from? That depends on your type of policy. In a whole life policy, the growth comes from dividend payments from the insurer. In a universal life policy, you earn annual interest. Variable universal life policies let you place your cash value in the market via subaccounts, which are similar to mutual funds.
 
One interesting and relatively new option is an indexed universal life policy. In these policies, you can potentially receive interest each year based on the performance of a market index, like the S&P 500. If the index performs well, you earn more interest, up to a limit. If it performs poorly, you earn less interest. Your principal never declines, however, even if the index does.
 
An indexed universal life policy could help you achieve tax-deferred growth based on market returns without exposing yourself to market risk. If you want a consistent, predictable rate of return, consider a universal life policy, which pays a set interest rate each year and has no risk of market loss. In fact, any cash value life insurance policy, with the exception of a variable universal life policy, will provide tax-deferred growth potential without market risk.

Tax-efficient retirement income. 
If you’re like most Americans, you’ve used a qualified savings plan such as a 401(k) or IRA to save for retirement. These accounts are effective because they offer tax-deferred growth. As long as the funds stay inside the account, you don’t pay taxes on your accumulation. Distributions from these accounts, however, with the exception of the Roth IRA, are taxed as income.
 
If you will rely heavily on your qualified accounts for income in retirement, you could face significant tax exposure. Market volatility could also impact your retirement income. The combination of withdrawals and market declines could erode your savings, forcing you to adjust your income.
 
Life insurance can help with both taxes and potential market risk. When you take a withdrawal from your life insurance cash value, your original premiums come out first. Those distributions are tax-free, which means you can use your life insurance cash value to create supplemental retirement income that isn’t taxed as income.
 
Also, as mentioned earlier, your life insurance cash value may not have exposure to market risk, which means your income from those policies isn’t vulnerable to downturns. Some retirees opt to take supplemental income from their life insurance during years in which the markets perform poorly. That helps them take less from their other accounts and potentially preserve their assets.
 
Ready to learn how life insurance could offer you additional protection in retirement? Let’s talk about it. Contact us at First Fidelity Group. We can help you develop a full retirement strategy and determine which tools are right for you. Let’s connect soon and start the conversation.
 
1https://ycharts.com/indicators/sandp_500_total_return_annual
 
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