Capital Equivalent Value
What Wall Street Won’t Tell You About Life Insurance
What Is Capital Equivalent Value?
Capital Equivalent Value is the amount of money you would need in a traditional account (like a 401(k) or IRA) to match the net, after-tax value delivered by a properly structured life insurance policy.
This concept comes from financial modeling and was highlighted in a 1990 GAO (Government Accountability Office) study that compared various retirement strategies.
Why Is More Capital Required in Traditional Accounts?
Because:
- Traditional retirement accounts are taxed as ordinary income upon withdrawal
- They are subject to market volatility
- They have Required Minimum Distributions that force withdrawals whether you need the money or not
- They lack tax-free access and often come with penalties for early use
Meanwhile, properly designed permanent life insurance:
- Grows tax-deferred
- Allows tax-free access via policy loans
- Has no RMDsProtects from market downturns (with guarantees or indexing)
- Transfers tax-free to heirs
The Capital Gap: 30% to 40% More Required
To replicate the same retirement income stream that a properly structured life insurance policy provides:
-- You would need approximately 30% to 40% more saved in a traditional, taxable or tax-deferred account.
Example:
Let’s say a life insurance policy provides $50,000/year in tax-free income via policy loans. To match that $50,000/year:
-- You’d need ~$70,000 to $75,000/year in gross distributions from a 401(k) (assuming a 25–30% tax rate)
Which means your traditional account balance must be significantly higher to safely produce that income over time.
That difference in required capital is the Capital Equivalent Value — and it’s why life insurance is not just competitive… it’s often superior.
The Bottom Line
When comparing financial tools, don’t just ask: “What’s the rate of return?
”Ask: “How much capital do I need to create the same net income — with the same level of certainty and tax efficiency?”
In that comparison, life insurance often wins by a wide margin.
Most Americans don't realize that a tax free retirement is possible. We help individuals discover tax free strategies, and help determine which strategy is your best fit.