The diversification difference
Consider two hypothetical retirees with $100,000 in income— one entirely in tax-deferred accounts, the other split between tax-deferred and tax-free sources.
Tax-Diversified
12%
-$3,600
0%
-$0
$96,400
$50,000
$50,000
Tax-Diversified
In this scenario, only $50,000 in retirement income is coming from sources that are taxed as ordinary income, with the other $50,000 coming from tax-free sources like life insurance policy loans. As a result, the retiree falls into the 12% tax bracket and pays about $3,600 in income tax.
Example assumes a single filer claiming the standard deduction and paying federal income tax under 2026 tax brackets. Does not account for state and local taxes or for the differential in taxes on contributions to pre-tax vs. after-tax accounts. This example does not represent the performance of any particular product; your actual results will vary and may be more or less favorable.
Applying life insurance policy cash values in order to supplement retirement income significantly involves making a long term commitment to paying premiums and keeping the policy inforce. This hypothetical example is strictly a mathematical scenario related to how tax rates apply. It does not represent how much income can be accessed from a specific life insurance policy. That will depend on the structure of the policy, its funding and other factors that are not represented here.
Tax Bracket
Taxable Income
$100,000
22%
-$13,000
$87,000
In this scenario, the entire $100,000 in retirement income is coming from sources that are taxed as ordinary income, such as a Traditional IRA. As a result, the retiree falls into the 22% tax bracket and pays about $13,000 in federal income tax.
Taxable Income
Tax
After Tax-Income