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Create Your Own Pension Using Whole Life Insurance

In order to fully understand this post I am going to have to ask you to put down your $19.95 Suze Orman book or shut off your podcast of Dave Ramsey – and give me a chance to describe and illustrate how to create your own Pension Using Whole Life Insurance before leaving me comments of hatred of the product.

This post is coming off the heels of the supposed desire to kill off the 401(k) or to proclaim it as dead.  There is absolutely no reason to go over the discussion when much better bloggers than me already have:

To sum up both bloggers – 401(k)s aren’t bad.  People just want someone to blame, and pensions are never coming back.  I am going to show you a real life illustration using an illustration system of a AAA Rated Insurance Company that has been around longer than some of our States!  So lets create a pension income!

Using Whole Life to Supplement Retirement Income

Lets choose our Variables:

  • 40 Year old Male;
  • Non-Smoker; Select Rating (one under the top level);
  • For round number purposes, we will use $1,000/month premium; and
  • Person is Going to Pay premiums until Retirement (65) just like with a “real” pension and then start pulling an income stream from 65 to 80.

Any change to any of these variables will drastically alter the calculations, but I would be happy to change it up.  So, I put these inputs into the black box that is the insurance software, but Evan – don’t you care about expenses? No because I am only worried about my guaranteed income stream?  Won’t dividends change? Yes, but as with any pension schedule you won’t know exactly what you are looking at until you are 2 or so years out from retirement.  For instance my brother is one of the brave FDNY Fire Fighters – his pension is a function of his last couple years of work, but how much will he be making in 20 years? He has somewhat of an idea, but it is very uncertain.  Evan, Can’t the company go out of business? Yup but look at all those GM employees!

So what does $1,000/month get you for this set up?  This set up will provide $33,200/yr tax free from ages 65 to 80 while providing a death benefit which starts at $1.1million at 65 down to $629K at 80 – Received by your heirs also income tax free (not estate tax but that is a separate issue that most insurance agents don’t understand).



  1. Hey Evan – Thnx for this. The income really is tax free? Do you know what rate of return they are giving, and whether that annual rate of return is also tax free?

    I really thought about doing Whole Life, but the amount I want ($3 million) will “cost” me a ton of money in cash flow every month.

    Even in your example, since I’m using my “Going Broke To Won Big” method, I can’t come up with an extra $1,000/month Term life for 20 years at a fraction of that is so much cheaper, and serves the same purpose, except I don’t have the cash in the end.

    I think this is the crux of the problem. How many people have an extra $1,000/month lying around after funding their 401K, IRA, EF, mortgage payments etc?


  2. FS,

    The income is tax free because it is a loan against the cash value that switches at basis.

    If you need $3,000,000 for protection purposes, that is different then the point of the article. However, a lot of financial professionals can do some sort of mix between whole life and term (usually referred to as Blended) which may be able to provide a similar outcome.

  3. Evan, it’s great that you’re challenging some stogy ideas and with well-written content too. I have to say, from the perspective of someone who has had to undo some of these deals before they blow up, reality isn’t always as nice as it is on paper.

    With the permanent types of life insurance you can use for this strategy, you are either relying on dividends from the insurance company or you are relying on a percentage and internal costs. Life insurance companies will either keep control of how much they send your way or they will keep control of how much they charge each year, or both.

    So using permanent life insurance (fancy talk for any kind of whole life or universal life) for retirement income exposes you to additional risks other investors don’t have – the business risk of an individual life insurance company. They could decide they want to make more money on the policy series you own, or on all their policies, and wipe out your retirement plans over time by eroding your real returns. I have seen this happen on policies from some big name, well-respected companies.

    If this happens to be a noticeable portion of your retirement plan, it could hurt. Not to mention that loans from a policy are income tax-free, but only while the policy is still in effect. So if you are in a loan position and the policy lapses because dividends went down or internal costs went up, you have a taxable amount in the year your policy ceased to exist. Imagine not having any more income and a huge tax bill in the same year. Ouch.

    Am I saying don’t do it? No, every plan is suitable for someone. I’m just saying you should be aware of the new risk you didn’t have before. And if you decide this is right for you, keep some semblance of diversification in mind.

    • While I agree with you that is risk – as to both interest rate and expenses. I have also seen this strategy blow up, and it gets messy, but I have also seen 65 year olds with a 401(k) which lost half its value.

      Regardless, I agree this should NOT be your sole retirement strategy…but it is something that should be considered in combination with your other intentional strategies.

      It provides diversificaiton with a stream of income.

  4. Hi, I just saw this article and love it. This is what I try to show my clients. Whole life to me provides income when we have those inevitable markets. I refer to whole life as an asset.

    I just ran an illustration with the same parameters above. So that people know that those numbers are not fabricated, from ages 65 to 80, our now 45 year old male could have an income stream of $43,413. These are just projections, but at least with my company, the actual results have usually come out better than the projections. The death benefit would still be over $300k at age 80. The key to whole life is that the cash accumulates a little slowly at first, but then it gets around 6% cash on cash return into your retirement and “safe” years. Not bad.

    • Michael, you should name what company that is because that result sounds outstanding. Most of the mutual companies I am aware of have decreased their dividends or eliminated them altogether over the last 20 or 30 years. When you consider the planned accumulation and distribution stages, plus keeping the policy in force till death to avoid income tax, it will be at least that long.

      In order for your claim to be correct that actual results have been better than original projections, you would also have to have some original illustrations on hand from back in the day. I look forward to your response.

    • Michael,

      Wow you got 43K/yr! That is a great product, there is no need to name any companies here, since I am really not trying to sell anything.

      I find that the net return on investment is usually hovering around 4.5% towards the end of the policy (unless you die ofcourse in the first 20 years and then your family’s return is “outstanding” – but you are dead so that’s not that great lol).


      Which mutual life insurance company cut their dividend all together? That would make little sense, since there would be ZERO reason to then buy whole life insurance from that company. It would be the nail in the coffin (pun intended, but may have been too cheesy ).

      • Off the top of my head: Prudential, John Hancock, Canada Life, and Mutual of NY (MONY now part of Axa). This is usually in the form of demutualization (where a life insurance company turns into a stock company). Yes you get stock certificates instead of your policy participating in dividends, but that is a major blow to the tax-advantaged hopes you had for your policy.

        According to Wikipedia, over 200 life insurers have demutualized since 1930. Individual policy holders have very little say in this decision, even though it may have a significant impact on their long-term plans. Because of the high surrender charges associated with life insurance policies that can last 20 years or longer (and the unpredictability of your future insurability) this creates a unique risk most types of investors don’t have to worry about. Just saying.

        • Aaron,

          I misinterpreted what your point was. There have been a lot of companies that demutualized 100%, and that does screw with your plans. I thought you were saying that you heard of current mutualized companies getting rid of their dividend.

          And you are right, Dividends and the illustration I provided (I have no idea who this Michael guy is lol) are not guaranteed. But think about all those people who started investing in 1980 when you could get a CD at 18% lol – and their illustrations.

          • From my knowledge, CD’s aren’t sold based on future projections that could change annually but lock you in for a long period of time. Imagine how different things would be if CD’s had long surrender charges that could erode your original principle and the interest rate might be different year to year.

            The bank either pays the interest for the time designated or it folds. Banks don’t have an option to pay less over the specified time if they don’t feel like it.

            So yeah Evan, I’d take an 18% CD because my risks would be predictable and easily understood:) In fact, I look forward to it.

  5. Now you are the one misunderstanding me lol. Communication break down!

    Alright, first I’ll clarify, what I meant was people doing retirement calculations when their safest investments were returning 18%. HELL IN TODAY’S INVESTMENT WORLD WHO WOULDN’T TAKE 18% LOL. HELL, I’d take a 9% CD any day of the week, or in fact even a 5% 1 year (not 5% – 5 year).

    “Imagine how different things would be if CD’s had long surrender charges that could erode your original principle and the interest rate might be different year to year. ”

    Most CDs have some sort of penalty for invading early. Most are just for interest, but there are some that go after principal. So they may not call them surrender charges, but it doesn’t matter, if they are in fact invading principal.

    Third, there are CDs that are callable CDs where the bank can change the rules on you, but I have never seen this advertised.

    I am not really sure I understand your position. Are you against the strategy outlined in this post? Do you just not believe Michael (his #s seem really high)? Are you just saying it isn’t guaranteed? Do you think I didn’t highlight the downfalls enough? Are you just anti-whole life?

  6. You’re certainly right that callable CD’s have been mis-sold too. Sorry for not thinking about that before I responded.

    I’m not against this strategy – everything is suitable for someone, right? I just think it holds a lot of risks that aren’t very well understood and even less frequently publicized.

  7. Hey guys – I don’t think I can say what company I was quoting. (I also do a lot of securities business, so I don’t want compliance saying I’m advertising behind their back).

    The company’s life insurance that I mostly like to use (the same one quoted) is from a very quality insurer. I refuse to use the cheapest insurance out there, since I don’t think I can even put any value on their projections, or guarantee that they’ll be around in ten years. This company has been around since the mid 1800s, so the track record is there.

    Also note, that whole life policies can provide a back up in the case that someone becomes disabled and can’t work. Even if you receive disability, it’s almost impossible to keep funding a retirement plan. By choosing a waiver of premium rider (not expensive at all), this company will fund the cash value life insurance policy for you.

    Whole life is a great PART of a financial plan, but don’t make it your only part. Finding the right amount and exact type of policy are also important. Please don’t just read any of these comments and just go purchase the next whole life ad you see. Consult a professional (not a salesperson).

    • No need to name the company, I don’t believe it takes away from your message. I have a lot of other great insurance stuff all over the blog…go ahead and check it out

    • Northwestern mutual is a great co (if you can get a policy; they’re very conservative). They have good dividends and a strong track record.

      The4-5% rate of return is about right for a good long term projection from a reliable co. It doesn’t sound Great, but is pretty good in the current environment. I think perm life can make sense as a PART of your retirement plan by representing your conservative portion of your nest egg. I would only do this if i had funded my 401k/ ira and wanted / could do more. Only other tax deferred vehicle out there.

  8. Just a note unrelated to your very interesting topic. You seem to use the word “then” when you should be using the word “than”. This misuse may make you seem unreliable. Just a heads-up if you are interested.

  9. Saw an article in Bloomberg about using life products for retirement income taxfree rather then for the insurance, the borrow the money out theory…. I have been able to find no agents who are familiar with this.. Whats the secret handshake?

    • NO secret handshake you just need to talk to someone that knows what they are doing. I would recommend talking to an experienced agent from MassMutual, The Guardian, NorthWest Mutual…

    • Hi DonG.

      Wondering if you could help me locate the article you referenced in Bloomberg re: whole life insurance as retirement income.



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