Life Insurance Is Not An Investment

“Life Insurance is not an Investment”

Have you ever heard the expression: “life insurance is not an investment” or that “you should keep your life insurance and your investments separate“. Its hard to do due diligence into leveraging life insurance without coming across people saying this.

The goal of this article is to show you that it doesn’t matter what you call it. Life insurance is a financial tool. As long as maximum over-funded life insurance can meet your financial goals, then it is a financial tool that you should use in your financial planning arsenal. And I want to also be clear that I’m referring only to maximum over-funded life insurance. A maximum over-funded policy is not your typical term or traditional permanent life insurance policy.

I’m going to address this in three sections. I want to first deal with the presupposition that life insurance is somehow different from an investment. Then we need to discuss: What is the goal of investing? And finally, I’m going to finish up by showing the advantages of using a maximum over-funded life insurance policy.

Presupposition: Life Insurance Is Different From An Investment 

So let’s start with the presupposition that life insurance is somehow different from an investment.


Life Insurance is not an Investment. It is Life Insurance. The difference is that life insurance has a death benefit. And by that token, life insurance can serve as a self-completing mechanism in a retirement plan. This is the traditional way that most financial advisors and insurance agents use it. The death benefit is used to replace the income of a working spouse. This is much the same as saving for retirement to replace the income that will be lost when you retire.

Policy Loans. A Game Changer

However, life insurance has some unique features besides the death benefit. The investment management industry really doesn’t want you to know about this. One of the most important features is the ability to take a policy loan. This feature is written into the state statures of all 50 states. This language comes from Florida, but all of the states have similar language:

Life Insurance is Not an Investment

Notice that the statutes state: The insurer will advance an amount equal to the cash surrender value of the policy. It doesn’t state that you can borrow your own money. It states that the insurance company must make a loan to you with your Cash Value as collateral. They are loaning you their money. The statutes go on to state: “The policy may also provide that, if the interest on any indebtedness is not paid when due, such interest shall then be added to the existing indebtedness” In plain English that means if you don’t pay the interest on your loan, they will loan you enough to pay themselves the interest and tack it onto your loan balance.

How awesome is that?

This loan feature and the ability to capitalize the interest is the magic that allows for the cash value of a life insurance policy to produce much more income than traditional retirement planning assets. Can you see why the Investment Management folks don’t want you to know this? This ability to provide more after-tax income than traditional investments makes life insurance a powerfull retirement planning tool.

What is the purpose of your investments? 

Let’s think about some of the reasons why people invest. One of the primary reasons that people invest is to save for retirement. Other reasons might be saving toward college expenses for children or to buy a house. But since my business is Innovative Retirement Strategies, I want to focus on the retirement planning goal of investing. I believe that most people are investing to build wealth that can generate income when they retire.

It is important to understand that you can’t take your wealth with you when you pass away. That means that if you’re not spending it in the present moment, there must be something in the future that you are saving towards.

Life Insurance Retirement Plan (LIRP) 

One thing that is lost on many of the Investment gurus is just how much income you can get from a LIRP. Because you are borrowing against the cash value of the policy and not making withdrawals, the cash value securing the loan is still growing even while you are receiving income. When I first realized this, I had to build a spreadsheet to prove it to myself. And when I saw the difference, I was amazed. I thought to myself:” I have an MBA in Finance and Investments. Why didn’t I learn this in Grad School?”

There are two key takeaways that I want you to understand about LIRPs.

  1. Understand that a life insurance retirement plan should provide two to three times the income from the same amount of savings.
  2. Understand that dollar for dollar, a life insurance retirement plan should provide more income for almost anyone over the age of 30. 

 A LIRP Can Provide 2-3 Times The Income Of Traditional Retirement Savings 

It’s important to understand that the cash value can provide 2 to 3 times the income from the same amount of money. For this reason, it is not necessary to make risky investments to achieve a greater rate of return on your investments. You should realize that assets growing at a lower rate may still be able to produce more income. Income is what puts food on the table and keeps the lights on, not the value of your account.

 The 4%-Rule 

If you are familiar with my work on this site, then you know that I don’t simply make claims. I back everything up and show you the numbers. When I state that life insurance cash value can produce two to three times the income from the same amount of savings, I’m using the 4% rule as a benchmark. The 4%-Rule is used by financial advisors to determine the safe amount of income you can take from your savings without risking running out of money before you pass away. Don’t take my word for it on the 4% rule. Do a Google search on the 4% rule.[1]

What this means is that the 4%-Rule should allow you to take out $40,000 a year (4%) for every $1 Million in savings. It’s important to realize, however, that if your savings is in a traditional IRA, or a 401k, then that distribution is all subject to taxation at ordinary income tax rates. Your savings hasn’t been taxed yet![2] If you’re in a 25% tax bracket, for example, you are going to  have to write a check to the IRS for $10,000. And then you get to look forward to a net of only $30,000 a year for the rest of your life.

8%-Rule For Life Insurance 

Even though Life Insurance is not an Investment, you should realize that a life insurance retirement plan can realistically generate income in the 7% to 8% range. This means that the same million dollars, if it were cash value, would be able to generate up to $80,000 a year of income. And because this income is tax-free, you’ll note that this is nearly 3 times the income that the “traditional” investment provided.With Income like this, do you care that “Life Insurance Is not an Investment”?

8%-Rule Example 

This illustration was for a client who was putting $45,000 a year into a maximum over-funded policy for only 10 years. Notice that we are looking at the page showing where the client reaches their retirement age. Look at the fifth column from the left, labeled “policy loans”. The illustration is showing projected income of $128,445. You should also know that this projection runs through the client’s age of 120. That means this person doesn’t have to worry about running out of money or income before they pass away.

Don’t use the wrong numbers

You should also notice that the illustration is showing two different sets of projections. Look at the section labeled “Using Illustrated Crediting Rates.” This section shows the assumed growth rate of 5.69% on the cash value for these projections. In the section labeled “3.5% Alternative Crediting Rate” I’m projecting the growth of the cash value at only 3.5% per year. You can think of this as a worst-case scenario.

Be aware that the income calculations are based on the “Using Illustrated Crediting Rates” projection. As a result, you will notice that the cash value goes to zero in the “3.5% Alternative Crediting Rate“. This is because you cannot take $128,445 per year in loans if the cash value only grew to a total of $905,514 at retirement age. The “Using Illustrated Crediting Rates.” scenario has nearly twice as much cash value at retirement age and can sustain loans all the way out through age 120.

If you get your calculator out, and you divide that $128,445 of income by the cash value from the year before ($1,716,621), you will realize that it represents a ratio of about 7.5%! This number is directly comparable to the 4%-Rule we discussed earlier for “Traditional” retirement savings. This represents the safe amount of income the client can take without worrying about running out of collateral before they pass away.

 Dollar For Dollar, A Life Insurance Retirement Plan Should Provide More Income 

I know what everyone is going to say at this point: “you know, that’s all great, Tom. But we know that life insurance doesn’t offer the potential for high returns. The cash value is invested in bonds and other interest bearing assets that don’t have a very high rate of return. I’m going to be much better off by investing in some other asset class.”

Just realize that while it may be true that you can accumulate more assets by investing in some other asset class, what really matters is how much income your assets can produce. Since the previous section established that we can get two to three times the income from the same amount of savings, we now need to establish whether it is feasible to grow your alternative assets enough to overcome that advantage.

Accumulation is not Income

This table shows the difference in accumulation between life insurance cash value growing at 5.69% and an alternative growing at 9% but in a taxable environment. As you can clearly see, the “Traditional Savings” does in fact provide greater accumulation by retirement age. But now the question is: will it provide more income? Income is what matters in retirement!

This graph summarizes the numbers from the previous table. The orange line represents the cash value of the policy. The blue line represents the growth of the assets in the alternative. As you’d expect, the alternative asset growing at 9% outperforms the life insurance cash value over time.  What you should find interesting is that the curves are so close together. It’s not that big of an advantage, is it? That’s because the cash value of the life insurance also has a tax advantage. It is not taxed.

So unfortunately, this is where a lot of the financial gurus stop. They see that the account statement shows more, so they think it’s all over.

Income is what matters

But you need to understand that the statements that you get from your financial advisors only show the value of your investments at one point in time. They are just numbers on a piece of paper. The statement itself doesn’t pay bills. What is really important to realize is: “how much income can I get from my savings?”

This graph applies the 8% and 4% rules mentioned earlier. The orange line shows how much income you can get for the rest of your life if you retire at any given age. Basically we are multiplying 8% by the amount of cash value at the end of the previous year. The Blue line illustrates the 4%-Rule. Here we are multiplying 4% by the asset value at the end of the previous year.

If you look along the horizontal axis to age 65, the blue line is showing you that the 4%-Rule would imply that you could take approximately $75,000 per year each year for the rest of your life. But if you look at the orange line, you can see that the cash value of a life insurance policy would generate about $180,000 each year for the rest of your life.

Which would you rather have?

Twice the Income from the same amount of savings

Do you see that this is more than twice the income from an even lower account value? A 36-year old, who puts $45,000 into a maximum over-funded life insurance policy each year for 10 years, would get more than twice the income of another 36 year old investing in traditional retirement assets.

Dollar for dollar, the life insurance retirement plan will likely provide twice the income. It’s important to understand that Income is what matters, not total accumulation.

So this confirms my original thesis, which is, it doesn’t matter what you call it, if it accomplishes your retirement planning goals, it should be a part of your retirement planning toolkit. Because what I’m showing you here clearly shows that life insurance can generate much more income from the same lot of savings, it is a disservice for anyone to tell people that they shouldn’t use life insurance as an investment, or to keep your life insurance and your investments separate.

The Advantage of a Maximum Over-funded Life Insurance Policy As an Asset Class 

The third thing that I want to talk about is the advantage of maximum over-funded life insurance as an asset class. I have shown you that it doesn’t matter what you call it, if it meets your investment goals, then it has a place in your retirement planning toolkit. Now let’s take a look at the advantages of a Maximum Over-funded Life Insurance Policy.

Principal Protection 

Unlike bonds, equities and mutual funds, you don’t have to worry about your cash value going backwards or down. Life insurance products include guaranteed minimum interest crediting or dividends. As interest rates rise and fall, the dividend and interest crediting rates on policies may change, but downside risk is limited by the guarantees of the policy.

Fixed-Income Returns Without Interest Rate Risk 

Insurance companies have very long term liabilities and can match their investments to their liabilities. A bond trader will be hurt when interest rates rise. The value of every bond they own will decline and investors will see their account value drop immediately. On the other hand, a life insurance company could likely hold their investments to maturity. It’s the interest the bonds are generating that gets credited to the policies as part of the dividend. The overall value of their reserves will decline, but the interest income remains unchanged. And as they purchase new bonds with higher rates, the overall returns will begin to rise too.

When you’re buying bonds, and holding them to maturity, the coupon rate is the rate you’re going to yield to maturity.

Liquidity With Long Run Return Opportunity 

Cash value also offers liquidity with a long run return opportunity. So what do I mean by that? Because life insurance companies are investing with long planning horizons, they can typically capture a higher yield in exchange for keeping their money tied up for so long. However, life insurance companies are required by state statutes to make loans to their policyholders with the cash value serving as collateral. This offers immediate liquidity to the policy owner’s cash value. You can earn long run interest rates and still have the liquidity you need.

More INCOME Per Dollar Of Savings 

The cash value of life insurance can generate 2 to 3 times the income of traditional retirement planning assets. Since policy loan interest rates are typically pegged to the Moody’s Corporate Bond Yield which is typically lower than the dividend or interest-crediting rate of the cash value, the interest-crediting rate on the cash value is likely to exceed the loan rate on policy loans. This creates an opportunity for positive interest rate arbitrage. This is one of the reasons why cash value can generate more income than traditional savings.

Because the cash value never leaves the policy, ALL of the cash value continues to grow and earn interest. Traditional retirement savings are depleted by the withdrawals and distributions that you take. I want to stress again that the insurance company is making a loan to you of their money with your cash value as the collateral. So each year when you have interest on your loan, the insurance company knows that the cash value securing is growing at the same time. The insurance company then loans you the money to pay themselves the interest and they add it to the policy loan balance.


The main point of this post is that it doesn’t matter what you call it. If a maximum over-funded life insurance policy meets your investment objectives, then it’s a financial tool that you should include in your financial planning arsenal. Don’t listen to people who say “keep insurance and investments separate” or “life insurance isn’t an investment.”

I’ve shown maximum over-funded policies earn 2-3x more income than traditional retirement assets.

Most people get more after-tax income from a well-designed, max over-funded policy than traditional retirement assets. Most people don’t understand maximum over-funded policies. They differ from typical life insurance.

Once you know the cash value earns 8% income, you’ll see life insurance belongs in retirement plans.

[1] https://www.cnbc.com/2015/04/21/the-4-percent-rule-no-longer-applies-for-most-retirees.html

[2] Unless it is a Roth.

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