There seems to be an unlimited number of financial pundits espousing the advice that life insurance will be unnecessary in retirement. Unfortunately, that advice flies in the face of my real world experience of writing life insurance on a significant number of 50 and 60-year-olds.
Sometimes the life insurance is needed (wanted) because life didn’t go according to script; health issues, divorce, lay-offs, caring for parents – any number of things. But even when life does stay reasonably on point, having cash value life insurance during retirement can be a tremendous boon. How so? Sequence of returns.
During the accumulation stage of investing, the sequence of returns doesn’t matter. Annual returns of 12%, 5%, -3%, 17% and -20% will produce the result as -20%, 17%, -3%, 5% and 12%. But once withdrawals commence, then the sequence of returns absolutely matters. Negative or paltry returns early on can have severe adverse consequences throughout retirement.
How can having cash value life insurance help? The cash value (remember, it’s actually the reserve to pay the ultimate claim) is guaranteed to increase every year, regardless of market conditions. (Dividends are an additional component of cash value, but they are not guaranteed.) So when the portfolio suffers a downturn, instead of making it decline further by taking money out, the money can be borrowed from the life insurance policy instead.
As an example, let’s use the second set of returns from above with a hypothetical retirement portfolio of $1,000,000 and $40,000 per year (taken at the end of each year) required to supplement retirement income. At the end of five years, the portfolio with the life insurance would be more than $100,000 greater than one without. Now granted, $80,000 of that is the money that wasn’t withdrawn, but the life insurance clearly saved the portfolio $20,000 over just a five year period. Multiply that out over a 20 or 30 year retirement and it can have a significant effect on the portfolio.
This is just another example of what I always preach: the purpose for which you initially procure the life insurance may not be the purpose for which you ultimately use it.