The Secret Weapon To Increasing Retirement Income

Kevin Wenke

Kevin Wenke

CFP | CLU | Investing | Insurances | Taxes

When you work hard but are sacrificing the enjoyment of your earnings today to build an investment portfolio that will generate income tomorrow, enabling you to be financially free, you want to plan for that portfolio to generate as much income as possible with the least amount of risk. The last thing you want to see happen is for your earnings capacity to dwindle over time?

This, unfortunately, has been a nightmare scenario many have experienced after all the stock market and real-estate crashes of the 21st century.

If you don’t want to have that happen to you, then I want to introduce you to the secret weapon that will allow you to increase the amount of income you have to spend in retirement by helping you to reduce your overall risk and leverage everything you have sacrificed to create. That product is whole life insurance

Now I know what you may be thinking a few things like, 

“Life insurance is going to give whoever I leave the policy to when I die a whole bunch of money to retire on, but not me…


“Whole life insurance is a horrible investment with crappy returns and high commissions that only benefits the person who sells the policy

As someone who is a CFP and fiduciary who also owns my own Registered Invest Advisory Firm that generates its income from people who invest their money into portfolios, I am here to tell you that both of these statements are not true.

Instead, whole life insurance, specifically a policy issued by a mutual life insurance company, is the secret weapon to building a strong portfolio capable of generating significant retirement income.

How? Well, that is what I am going to explain in this article.

Mutual Whole Life Insurance and Dividends

Whole life insurance is a type of permanent cash-value life insurance that provides coverage for the entire lifetime of the policyholder. Unlike term life insurance, which provides coverage for a specified period (for example, 10-year term), whole life insurance policies have a cash value component that accumulates over time by earning a guaranteed minimum rate or return so that the cash value will equal the death benefit at a defined age (usually age 121.)

Whole life insurance issued by a mutual life insurance company has the added potential of generating dividends. When earned, these dividends will significantly increase a policy’s cash value rate of return. You will find that the dividend correlates with interest rate changes in the economy, but many times exceed those rates, which is important because it allows you to keep up with inflation.

Dividends, when generated, can be used to pay premiums, increase the amount of death benefit through the use of paid-up-additions and one-year term insurance, or received as tax-free income to the policy owner, which is what this article is all about.

How are dividends from a mutual whole life insurance company determined?

It has been said that owning a mutual life insurance policy is a lot like owning a conservatively run hedge fund because its returns aren’t 100% correlated to any asset class.

That is because mutual companies invest policy owners’ premiums into a wide variety of investments to increase return and minimize risk. These investments include fixed-income portfolios and other product lines to compliment their insurance offerings (like term life insurance and annuities where the profits are allocated to the whole life insurance policy owner), and they even invest in other companies like investment broker-dealers, mutual funds, or insurance brokerages that sell other company products to earn commissions. All of the profits from these investment activities reduce the amount of premium they need to collect from policy owners to pay the policy benefits, thus increasing the surplus they have left after paying all claims and expenses, which ends up increasing the dividends they pay out to policy owners.

Therefore, the big thing to know is that when you have your money tied up in a whole life insurance policy, it isn’t just sitting there doing nothing. It is instead being put to work to generate returns so you, the policy owner, can benefit from both the life insurance policy’s benefits like death benefit, guaranteed returns, waiver of premium, guaranteed insurability, and most importantly, for this discussion – the right to receive dividends!

Taxation of whole life’s dividends 

If you want to increase income in retirement, you want the kind of income that keeps Uncle Sam out of your pocket. Since the dividend income from whole life insurance is considered a “return of premium” and not “income” which is an important definition. This means as long as the dividends a policy owner receives directly don’t exceed the amount of premiums paid into the policy, those dividends are 100% income tax-free! 
But here is the interesting thing about whole life insurance you should know…
You can receive cash flow from a policy that exceeds the amouint of premiums you paid through the use of policy loans. These loans require no underwriting as the insurance company lends you the money and uses your policy as collateral so there is no risk to the company. 
The implication for you as a policy owner is that you not only can receive tax-free cash flow from your policy, but that cash flow won’t increase the taxes on other incomes you will receive in retirement (specifically Social Security retirement income) nor will it increase IRMAA, or you Income Related Monthly Adjustment Amount to receive Medicare Part B insurance.

Structuring a Whole Life Policy to Take Income In Retirement

Buying and correctly funding any cash-value life insurance policy is a long-term commitment. It would be a crime to suggest otherwise.

However, I want you to know at Decision Tree Financial, we can help you obtain a commission-free cash value life policy that will build cash value faster than a similar front-loaded commissioned product like mutual whole life insurance if you are hesitant about making a commitment.

Just understand the policy will be a universal life (UL) product, not whole life, which we find won’t perform quite as well as a mutual whole life policy. Still, it is an option and will work to help you increase your retirement income when you keep a long-term commitment. The difference is you can get your money back faster with a commission-free UL if you abandon the strategy.

That being addressed, for any policy to reach its maximum potential, it will take time. How much time? 20 to 25 years! 

Yes, this is a long-time, so you will really want to understand how the policy fits into your long-term financial strategy. That is why I recommend you participate in my Financial Freedom Process so you can understand all aspects of your financial life so they can be coordinated and work efficiently together.

During the process, if it is determined that whole life is the right solution for you to generate retirement income in the future, we will suggest maximum funding of the policy to build cash value as fast as possible with the least amount of upfront death benefit coverage.

This is accomplished through the use of something known as “Paid-Up-Additions” (PUAs.)

Remember earlier when I said that the whole life insurance cash value earns a guaranteed minimum rate of return so that the cash value of the policy will equal the death benefit at a certain age? Well, PUAs are like buying little additional life insurance policies inside of the main policy that will mature without having to pay any additional premium – they are “paid up.” 

The cool thing, though, is that the money in these little paid-up policies is also eligible to receive dividends! 

There are two ways to buy PUAs:

  1. Pay/invest additional premiums out of pocket – instead of buying stocks, bonds, or real estate, you allocate your dollars meant for your future benefit into additional insurance whole life insurance contracts or
  2. Use the dividends your policy receives to buy PUAs – instead of taking the dividends in cash, have them reinvested into the policy.s

You can use both these methods at the same time but understand there is a limit as to how much money can go into a policy for it to still be defined as “life insurance” and receive the tax benefits associated with it. Don’t worry, it is easy to prevent, and we will make sure it doesn’t happen to you.

By loading as much cash value into the policy over time, you are increasing its dividend potential, which is what you want to generate tax-favored income in the future.

Now you might be saying to yourself as you read this, 

“Why would I put as much money into a life insurance policy when I can invest my money into something more aggressive like the stock market allowing me to have two or three times the net worth in the future to generate income with?”

I am going to agree 100% with you on this concern! However, I am going to encourage you to look past the limitations of the product and instead look at its dynamic to ask a different question which is:

“How can I leverage the cash value of a whole life insurance policy to increase my wealth more efficiently than I could had I not owned it?”

When you ask that question, it opens up a new set of possibilities and is the perfect spot to introduce the second part of this article on how whole life insurance is the secret weapon to increase retirement income.

Leveraging Whole Life Cash Value with LEAPS to generate stock market returns

No leverage Decision Tree Financial
No Leverage

 I am not talking about the type of leverage that requires you to take on more risk. I am talking about the kind of leverage that lets you do more with less.

Leverage allows you to accomplish more

Here is the deal. When you invest your money into stocks, you are doing so with the hope that your investment will be worth more in the future than it was today, agreed. Furthermore, you hope when you make that investment, it doesn’t plummet in value and be worth a lot less, right?

Well, that there is the conundrum when you consider investing in the stock market; you have to take a risk you could lose everything if you want the chance to make money…

I know that “they” tell you you can reduce your risk by investing in a diversified portfolio with stocks of different sizes that operate in different industries in different countries. I know…

Remember, I am an investment advisor. But this “status quo” way of thinking by the investment industry is also the reason I went out and started my own company. There is a better way to generate stock market returns – and it doesn’t involve one product…

It is a strategy!

You see, the problem with this diversified portfolio of stocks idea to manage risk is that there are times when it doesn’t matter what kind of stocks you own because EVERYTHING crashes, and nothing is safe…

This is known as “systematic risk” and, because of the way the financial system is set up, this type of risk ends up biting investors quite often.

To make it worse for investors, if you are “all in” with your money 100% invested in stocks like they teach young people to do because “time is on your side” to recapture losses, that is all you will be able (forced) to do because you won’t have any cash available to take advantage of any buying opportunities if the market “over crashes”…

This leads me to the second way to generate retirement income with whole life insurance. I call it “The SALLO Strategy” which stands for “Stable Assets Leveraging Life and Options.”

Here is the just of how it works…

Instead of investing all your money into stocks to generate returns, all you have to do instead is risk between 10-20% of your money into LEAPS (a form of option contract) to generate a similar return. The rest of your money is positioned into safe “stable assets” that are protected and available for emergencies or to take advantage of buying opportunities when they show themselves…

and wouldn’t you know it, one of those safe assets you can use is whole life insurance’s cash value!

So here is how this would work…

Assume you have $100,000 (or $1M or $10m, it doesn’t matter!) and you want to invest it in the market.

You could buy $100K in stocks and keep your fingers crossed in goes up but doesn’t crash or…

You could position $85K in stable assets (like US Treasuries and Whole Life Cash Value) and buy the option to buy $100K worth of stock BASED on today’s price for $15,000.

Fast forward a year into the future, and the stock market when up 50%! Awesome right.

Well, if you had invested in stocks, your portfolio would be worth $150,000, and you would be happy.

If you have invested $15,000 into LEAPS, allowing you to buy the stock at last year’s price, those LEAPS would be worth roughly $60,000, and the cash in your life policy and Treasuries would be worth about $90,000 for a total of….$150,000!

The exact same thing! AND you had the benefit of owning the life insurance contract and the protection benefits it provided (but hopefully didn’t need.)

Now here is where this is powerful. Instead of the stock market going up 50%, lets instead assume IT FALLS 50%…

Your stock portfolio is now only worth $50k. You held onto it because every investment guru told you not to worry because the stock market always bounces back…so now you have to wait and generate a 100% return to get back to even…

how life insurance can help recover from investment losses

However, if you would have leveraged Life and LEAPS, here is what would have happened.

Those LEAPS you bought giving you the right to buy stock based on last years price; well they are worthless. Why would you buy at last years prices when you can buy today for less? You wouldn’t…but that is OK.

The rest of your money grew “slow and steady” in your Treasuries and Whole Life policy and are now worth around $90,000.

Portfolio is Stocks After 50% Increase

Value $150,000 

Portfolio in SALLO After 50% Increase

Value $150,000 

Portfolio is Stocks After 50% Decline

Value $50,000 

Portfolio in SALLO After 50% Decline

Value $90,000 

Then ,with SALLO, you are positioned to buy low so that if the market bounces back 100%, you aren’t just getting back to even, you are actually MAKING MONEY.

You can see in the picture below based on 100 shares of the SP 500 how SALLO (the two asset system) would work compared to investing in the stocks directly.

Comparison Decision Tree Financial

SALLO allows you to accumulate wealth for retirement, own whole life insurance, and receive all of the insurance benefits the product provides AND manage risk so much more efficiently than just owning stocks outright. 

Then, when you retire, you can leverage your whole life insurance’s cash value and buy options against it to generate additional retirement income and continue to grow your net-worth to outpace inflation. 

Check out my financial freedom process if this is a strategy you would like to explore more. 

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