Using cash value life insurance as a buffer asset in retirement

Most people preparing for retirement focus on familiar strategies such as implementing a 60/40 portfolio, choosing between a Roth or a traditional individual retirement account, hedging with gold, or even adding exposure to digital assets. But one asset is often overlooked despite its unique ability to stabilize retirement income and maximize the longevity of overall retirement assets — and that is permanent life insurance, more specifically the cash value within.

Although many think of life insurance only in terms of the death benefit, life insurance’s strength when properly designed comes from its cash value and the ability to access it tax free. Not only can dollars within the cash value be borrowed tax free, but those dollars continue to earn interest or dividends while the money is lent out. 

With maximum funding of a properly designed permanent life insurance policy, the cash value feature allows the policy to act as a “buffer asset,” a financial tool that protects retirement portfolios from the damaging effects of market downturns and sequence-of-returns risk. By accessing the cash values for income rather than investment withdrawals during market downturns, selling investments at inopportune times can be avoided, which ultimately leads to greater asset appreciation and portfolio longevity.

To put this buffer asset into context, let’s go through a case study that uses data from an actual carrier illustration.

Rebecca, age 55

The case study will revolve around Rebecca, a 55-year-old Florida resident planning to retire at 65. She needs about $100,000 per year in retirement income. Between Social Security and a deferred income annuity, she expects $75,000 of that to be covered. The remaining $25,000 would come from her traditional IRA, which currently holds $400,000.

Her challenge is to avoid selling equities during market downturns and ultimately maximize her portfolio’s longevity. Beyond the financial impacts, she wants to reduce stress during volatile years in the stock market and eventually leave a meaningful legacy to her heirs.

To support these goals, Rebecca commits to funding a 10-pay whole life policy with $20,000 per year. After 10 years, she has paid in $200,000, and her cash value has grown to roughly $226,000, supported by a 6.10% dividend. By the time she reaches retirement, her policy is fully paid up, her cash value exceeds her contributions and the asset is ready to serve as her retirement buffer.

How the buffer asset works in down markets

To further illustrate the power of this buffer asset, I created a rough scenario for Rebecca’s retirement in which she will experience 10 years in which the market has negative performance. Instead of drawing from her IRA during those years, forcing her to sell equities at low prices, she takes tax-free policy loans from her cash value.

Over multiple downturn periods (ages 66–67, 69, 74–75, 78–80, 83–84), she accesses $250,000 through policy loans. This allows her investment portfolio to remain untouched during weak markets, giving her equities time to recover before she resumes withdrawals.

This simple shift in withdrawal timing can dramatically improve long-term portfolio outcomes, as demonstrated later.

Long-term policy outcome

Throughout retirement, Rebecca never repays the loans. Even so, her policy continues to perform because whole life loans do not function in the same way traditional loans do. Her entire cash value, including the portion she accessed, continues to earn dividends. Loan interest is charged at 5% during the first 10 years of the policy and at 3% thereafter. With a dividend crediting rate of 6.10%, she benefits from a positive spread, also known as interest rate arbitrage.

By age 95, her policy still shows more than $221,000 in cash value and provides a death benefit of more than $240,000 — even after she accessed $250,000 over the years. If she lives to age 100, the projected death benefit rises to about $265,000, offering her heirs a meaningful legacy while she enjoys uninterrupted retirement income.

A 20-year market comparison

To understand the impact of this approach, imagine Rebecca’s $400,000 IRA invested in the S&P 500 over the past 20 years, using historical market data.

If she withdrew $25,000 every year regardless of market conditions, her IRA would grow to about $976,000. But if she used her life insurance cash value in negative- or low-growth years and limited withdrawals to stronger market years, the IRA would instead grow to roughly $1.69 million, and that does not even include the remaining cash value or death benefit of the life insurance policy.

The difference in outcomes comes entirely from avoiding withdrawals in the worst market periods, thus preventing long-term depletion.

Why policy design matters

It’s important to note that not all whole life policies can perform this way. Traditional policies are often structured to maximize the death benefit, which results in low early cash value and limited flexibility. For the buffer asset strategy, the design must emphasize cash value growth. 

This means directing most of the premium toward cash value rather than death benefit and ensuring the policy does not become a modified endowment contract, which would limit tax advantages.

Two policies with identical premiums can produce dramatically different outcomes, depending on how they are designed. For retirees planning to use this strategy, proper design is everything.

The big picture

Permanent life insurance, when engineered for cash value growth, becomes more than just a death benefit. It becomes a stabilizing force in retirement — a buffer that protects investment portfolios during turbulent markets, supports income needs without forced selling, reduces financial anxiety and ultimately enhances the legacy passed to heirs.

Jacob Lewis is a life insurance agent with Income & Estate Planning Partners, Newark, Del. Contact him at [email protected].