How life insurance can defy the 4% rule

Retirement spending strategies are rarely one-size-fits-all. The well-known 4% withdrawal rule - suggesting retirees withdraw 4% of their savings in the first year and adjust for inflation — was designed to help ensure a 30-year retirement income. But for high net worth individuals, this rule can feel overly conservative, especially when their financial situation allows for more flexibility.

For example, a $5 million portfolio would limit spending to $200,000 annually under the rule, which may not align with the lifestyle or goals of affluent retirees. Many have additional income streams, illiquid assets or a desire to draw down principal more aggressively. Yet psychological barriers often prevent them from spending freely, even when financially feasible.

Life insurance gives permission to spend

Permanent life insurance can help solve this “permission to spend” dilemma by acting as a financial backstop. The guaranteed, typically tax-free death benefit ensures that heirs receive a meaningful legacy, even if the retiree draws down more of their assets during retirement. This assurance can help retirees to feel more confident using their wealth today, knowing that life insurance may replace depleted assets later.

Additionally, for clients with illiquid holdings — such as businesses, real estate or collectibles — the policy may provide immediate liquidity upon death, reducing the need for heirs to sell valuable assets under pressure. This liquidity may also be used to pay down debts or estate taxes, preserving the integrity of the estate.

Policy loans: Accessing value without selling assets

Another powerful feature of permanent life insurance may be the ability to borrow against the policy’s cash value. This strategy allows retirees to access funds without selling their investments, especially during market downturns. If the policy’s growth rate exceeds the loan interest, retirees may tap into the cash value through policy loans while potentially preserving long-term policy growth.

This approach can help retirees avoid selling assets at a loss, and in some cases, support annual withdrawals of 8%–10% or more, depending on the policy’s performance and structure. It is important to note that policy loans and withdrawals will reduce both the death benefit and cash value.  If not properly managed, they may cause the policy to lapse and may have tax consequences, especially if the policy lapses with an outstanding loan balance.

Early implementation is key

To maximize benefits, permanent life insurance should be implemented early—ideally while clients are young and healthy. Lower premiums and longer accumulation periods allow the policy to build substantial cash value, which can later be used to offset unexpected expenses, replenish assets or support higher withdrawals from investment accounts.

This strategy can be valuable for high net worth individuals who may face estate taxes or have more assets than they need for daily living. Delaying implementation until later in life can reduce effectiveness due to potential for higher premiums and shorter timeframe for cash value to grow.

It’s worth highlighting how permanent life insurance may do more than just provide a death benefit — it may empower retirees to spend confidently, replace depleted assets and protect their legacy. By integrating life insurance into a broader retirement strategy, high-net-worth clients gain flexibility, peace of mind and a powerful tool to navigate the uncertainties of retirement.

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Gabe Schulman is a partner at Lenox Advisors, a wealth firm with $5 billion in assets under management. Contact him at [email protected].