The cash value of whole life insurance policies could be a “secret weapon” for retirees trying to use the funds to supplement their retirement income during economic downturns, a new financial planning study suggests.

By drawing on the cash values of their whole life insurance policies — and avoiding the sale of equities from their retirement accounts in a depressed market — retirees could end up with more cash and a larger net legacy to their families at death, while still meeting their retirement income needs, according to a planning scenario study performed by Massachusetts Mutual Life Insurance Co.

Melissa Millan

“With this strategy, retirees don’t have to settle for liquidating assets in a down market or cutting back on their lifestyle choices,” said Melissa Millan, senior vice president at MassMutual, in a statement. “A retirement income strategy incorporating whole life insurance and an equity-based portfolio can tame a bear market by creating the flexibility needed to respond to changing economic conditions.”

MassMutual said that recent volatility has trapped many retirees in a vicious cycle: they have been forced to supplement their reduced income from their equity-based retirement accounts by selling stocks, even though the market has been depressed. But that means their portfolios need to perform even better, in order to both replace the withdrawals and to continue to produce income, according to the insurer. Furthermore, portfolio distributions are taxed as ordinary income at rates as high as 35%, depending on the retiree’s tax bracket. The process can eventually reduce savings dramatically, deplete them entirely and/or leave very little for heirs.

By contrast, retirees who purchased whole life insurance policies to provide a death benefit can better manage their retirement income distributions. By avoiding taking distributions from their retirement accounts during and following a negative market cycle, the account can more readily rebound from the downturn over time, according to MassMutual’s analysis.

During the down and rebuilding years when retirees are not drawing income from their retirement accounts, they can supplement their income by tapping the cash value of their whole life insurance policies. This supplemental cash is income tax-free.

Retirees also benefit from because they have the ability to leave a legacy when they die through the life insurance policy’s death benefit.

“As people prepare future retirement income plans, they should be aware of this strategy and its effectiveness in taking the sting out of market downturns,” Millan said. “Whole life insurance can help level off what otherwise could be a very bumpy ride.”