A recently published study claims that taking income from permanent life insurance and annuities in retirement can create a better outcome for investors. 

Ernst & Young compared five different strategies including investments only, investments and term life insurance, permanent life insurance and investments, deferred income annuities, and a combination of #3 and #4.

In their comparison, Ernst & Young considered insurance products part of the fixed income allocation and bond replacements.

They also used the permanent life insurance as a volatility buffer, where they access the cash value of the policy to pay for lifestyle needs during periods of market volatility, similar to the concept in the best-selling book, The Volatility Shield.

They ran 1,000 Monte Carlo comparisons with the goal of measuring sustainable income, and they used ordinary income tax rates.

Each income scenario sustained a minimum of 90% probability of success.

In the investment-only approach, it’s only inefficient from both an income perspective and from the legacy perspective.

The strategy that produced the greatest combination of income and wealth to heirs is the scenario where 30% went into a permanent life insurance policy, 30% into a deferred income annuity, and the balance into investments.

They recast the numbers for couples in different age brackets, but the results were essentially the same.

The permanent life insurance policy used in this study was whole life insurance, which meant that the loans taken in retirement had to ultimately be repaid out of the investment portfolio.

Had they instead used indexed, universal life insurance in the comparison, they could have shown a higher rate of return over time and guaranteed a zero-percent loan provision for the volatility buffer concept. In other words, they could have taken tax-free and cost-free distributions from their life insurance, saving money on interest payments and avoiding the phantom tax bill from the IRS.

The conclusion of the study is accurate, but, by switching out the permanent life insurance for indexed universal life insurance, they would have improved their outcome even further.

If they ran a scenario where tax rates doubled over time, the scenario would have pulled even further ahead than the investment-only scenario.

Mentioned in this episode:

David's books: Power of Zero, Look Before You LIRP, The Volatility Shield, Tax-Free Income for Life and The Infinity Code

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