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How business owners can use life insurance to help in retirement

Kelly Kowalski, Cliff Noreen, and Bronwyn Shinnick

Posted on January 24, 2024

Our executives and experts team up to write educational articles, covering a variety of financial topics such as life planning, college savings, and retirement.
Life insurance for supplemental income
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Note that a business owner's market-based retirement savings can be subject to volatility.

Break down the way cash value life insurance can be used to help cushion down market effects.

Describe how annuities can play a part in providing a guaranteed stream of income in retirement.

In today’s unpredictable economic climate, many business owners are finding that the traditional means of funding a comfortable retirement may not be reliable enough. Even with a wise investment of the proceeds from the sale of your business, the ups and downs of the stock market can negatively affect its rate of return, causing a ripple effect through your other retirement income sources. This could limit your ability to generate a large enough annual income in retirement.

One rule of thumb is that individuals generally need 75 percent to 85 percent of their pre-retirement income each year for retirement. With this in mind, it’s important that business owners consider creating a supplemental retirement strategy; one that provides for the accumulation of funds, tax advantages and flexibility. Life insurance and annuities may offer possibilities.

Equity-based assets in a down market

A traditional way to save for retirement is equity-based investments. These investments allow you the potential to enjoy long-term growth and multiple years of market upside while you are working.

However, the market downside potential inherent in these investments can have serious consequences if experienced during retirement. Taking distributions from equity-based retirement investments and accounts (like a 401(k) or IRA based on stocks and bonds) during a period of negative returns can have a significant adverse effect on the future value of your retirement account. This leaves you with a lower valued asset, limited in its ability to bounce back and grow during “up” markets. Ultimately, this can reduce the total amount of income you have available during retirement. (Related: The ideal retirement withdrawal rate)

Of course, the easiest way to avoid compounding your losses is to avoid withdrawing income from your equity-based retirement investments when the stock market is in decline. This is often difficult to do, so it makes sense to find a supplemental source of retirement income that can provide conservative growth without being impacted by market volatility. (Calculator: Retirement savings)

Whole life insurance with cash value

Life insurance is one way to protect against the financial hardships resulting from your unexpected death. When looking for reliable protection that will also give you the flexibility you need as your life changes, permanent life insurance may be a good addition to your retirement strategy.

In short, a whole life insurance policy’s cash value can provide a stable source of supplemental retirement income that is not affected by short-term market volatility. The accumulation of your life insurance policy’s cash value is guaranteed, regardless of market conditions. (Related: Whole life insurance explained)

Whole life insurance, in addition to providing death benefit protection, can add a conservative element to your retirement income strategy that may help give you more flexibility when weathering the inevitable market downturns that occur over time.

Borrow from a whole life policy

Since the cash value of a whole life insurance policy is unaffected by short-term market volatility, it can provide a stable source of income in those years when it’s inadvisable to take distributions from your equity-based retirement accounts.

For example, in the year immediately following a down market, and once you’ve met any minimum distribution requirements, you can take a distribution, in the form of a loan, from your policy’s cash value to supplement your retirement income needs.1 Using your policy’s cash value to supplement needed retirement income provides the opportunity to leave your investments better positioned to rebound when the market comes back. (Related: Cash value explained)

It’s important to remember there are implications to borrowing cash value or taking partial surrenders from a whole life insurance policy. These actions will reduce the policy’s cash value and death benefit. This could also increase the chance the policy will lapse, and it may result in a tax liability if the policy terminates before the death of the insured. To fully understand how tapping into a whole life insurance policy’s cash value can impact personal finances, some people turn to a financial professional for help.

Protect your family now and later

In addition to aiding retirement if needed, whole life insurance protects against financial hardships after death. Should you pass away prior to retirement, the policy’s death benefit can provide your family with the financial resources they’ll need after you’re gone.

If you pass away during retirement and predecease your spouse, your income sources like Social Security and pensions will likely be reduced. But with a whole life policy, your spouse or partner will receive a death benefit (less any policy loans taken), which can help them replace other sources of lost income.


Annuities are another option for diversifying your portfolio and providing for guaranteed income in retirement.

There are different types of annuities with varying ranges of payment terms, investment options, and distribution times. What kind of annuity is suitable for who will vary from person to person. (Related: Does an annuity fit your retirement goals?)

But among the choices are income annuities, which are specifically designed to provide a guaranteed income stream in retirement.

And for those on the cusp of retirement, an immediate income annuity may be worth consideration. An immediate income annuity typically is purchased with a single premium or “purchase payment” and requires that income payments begin within 12 months of the date your contract is issued. However, income annuities offer very limited access to withdrawals, and only for some annuity options. (Related: How one type of annuity can fit into a business owner's retirement)

This is just one type of annuity. There are other options and many turn to a financial professional to determine which one, if any, will fit their retirement goals.

Learn more from MassMutual…

The health hazards of being a boss

Selling your business and planning for the proceeds

Knowing the value of your business

This article was first published in January 2016. It has been updated.


1 Distributions under your policy (including cash dividends and partial/full surrenders) are not subject to taxation up to the amount paid into the policy (your cost basis). If the policy is a Modified Endowment Contract, policy loans and/or distributions are taxable to the extent of gain and are subject to a 10% tax penalty.

The information provided is not written or intended as specific tax or legal advice. MassMutual, its employees and representatives are not authorized to give tax or legal advice. You are encouraged to seek advice from your own tax or legal counsel. Opinions expressed by those interviewed are their own and do not necessarily represent the views of Massachusetts Mutual Life Insurance Company.