Why the Walmart DCMP May Beat Cash Value Insurance

Walmart and Sam's Club Leaders are often pitched Cash Value Life Insurance products, such as Indexed Universal Life (IULs), which are promoted for their tax benefits and risk mitigation. Common terms used by the salespeople that distribute these products are: "Tax-Free Withdrawals in Retirement" and "Downside Market Protection."

However, Walmart and Sam's Club Leaders have access to a tax efficient savings vehicle that the rest of the world doesn't: The Walmart Deferred Compensation Matching Plan (DCMP)! In many cases, contributing to the Walmart DCMP will result in more wealth than opting for contributing to a Cash Value Life Insurance policy.

Let's explore why Walmart Leaders may realize significantly more tax savings and higher investment returns by opting for the Walmart DCMP over a Cash Value Life Insurnace policy. The article provides Walmart Sr. Directors and Officers, an alternative perspective on the two key selling points used by the salespeople distributing these products.

#1 Tax Advantages: DCMP vs. Cash Value Policy

Cash Value Life Insurance policies offer tax-deferred growth and tax-free withdrawals, but they are funded with after-tax dollars. For high-earning Walmart Sr. Directors and Officers, who have already paid 35%-40% in income taxes, this "tax-free" feature can be misleading.

Fortunately, the Walmart DCMP allows for deferral of both income and taxes to a future date, potentially saving more on taxes. By deferring income and taxes NOW while in a high tax bracket, Walmart Leaders could benefit significantly from this tax arbitrage (e.g. high tax rate now vs. low tax rate in retirement).

The table below compares contributing $100,000 annually for 10 years to a Cash Value Policy versus the Walmart DCMP. The Cash Value scenario shows taxes paid upfront ($35,000 per year), with tax-free growth and withdrawals. In the DCMP scenario, contributions are tax-deferred and grow tax-free, and distributions are taxed at retirement at a lower rate.

A well-planned Walmart DCMP strategy could yield significant tax savings through tax arbitrage. For example, using the 2024 MFJ tax table, $140,000 of taxable income results in approximately $14,500 in federal tax, reflecting an effective rate of around 10%. This is substantially lower than the 35-37% marginal rate that might apply if the income were not deferred into the DCMP.

#2 Returns: Downside Protection vs. Upside Potential

The term "downside protection" means your investments won't lose more than a certain amount. For example, with a 0% downside protection floor, if the S&P 500 drops by 10%, your investment remains unchanged. However, downside protection comes at the cost of upside potential.

Typically, such Cash Value Insurance policies have both a floor and a ceiling. For instance, if the market rises by 20%, your investment growth is capped at 10%. The upside limitation pays for the downside protection.

For a high-income earner with savings and a long-term investment horizon, it might be more beneficial to embrace market risks and fully participate in the market upside.

The chart below illustrates the benefit that fully participating in the market provided over the last few decades. While the Cash Value policy limited the downside volatility in certain years, the upside of the market more than offset these losses.

For example, in 2010 if you made a $10,000 investment in the S&P 500 Index it would be worth $55,000 today while the same investment in a buffered strategy (0% Floor and 10% Ceiling) would only be worth $26,000. That is an expensive insurance policy, especially if you do not really need it.

Of course, past returns do not guarantee future performance. If the market declines in the future, buffered cash value policies may prove valuable. However, historically, the stock market has tended to appreciate over long periods of time.

Wrap-Up

While tax-free withdrawals and downside protection from Cash Value Life Insurance policies may benefit some, high-earning professionals with access to Deferred Compensation Plans, like the Walmart DCMP, should consider the opportunity costs of these Cash Value policies. These costs include paying income taxes today at a high rate (vs. deferring income via the Walmart DCMP) and potentially limited market returns over the long-term (the DCMP allows participants to fully participate in the market upside).

The decision is not straightforward, as both the Walmart DCMP and Cash Value Policies have distinct advantages and disadvantages. The impact on investors varies based on factors such as current tax rate, investment horizon, and time until retirement.

If you have a specific question on this topic or want to see if working with a financial planner makes sense for you, just reply to this email or schedule some time to chat via the link below. I'm happy to help!

Thanks for reading,

Mark Chisenhall, CFA, MBA

Taurus Financial Planning

[email protected]

Taurus Financial Planning is a Fee-Only Wealth Management firm based in Bentonville, AR. The firm offers comprehensive financial planning, tax planning and investment management to corporate executives across the country.

Taurus Financial Planning is a Registered Investment Advisor with the State of Arkansas. This information is provided as a guide to assist you in your financial planning. The specific examples are provided for illustration purposes only and are not representative of specific investments or guarantees of future returns. Please consult with a professional for specific questions regarding your particular situation. If there is any error or inconsistency between this document and the official company plan documents, your company plan documents will govern.

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