Make sure to also read “How to Use Life Insurance to Get a Tax Free Retirement and Guaranteed Income for Life”
The following article is part 1 in a 2 part series. Part 2 can be found here.
Indexed Universal Life Insurance: Quite Possibly The Best Retirement Plan Ever
Before we get into what great benefits the IUL (indexed universal life insurance) provides as a retirement plan and savings vehicle, let’s talk about some of the drawbacks of traditional retirement plans. Traditional retirement plans like 401ks and IRAs are in the stock market and have tax liability. Lets go in-depth as to what kind of risk that poses for the end consumer and how an Indexed Universal Life Insurance plan doesn’t have these risks.
Taxes Are Predicted to Go Up. Bad News For 401ks and IRAs. Doesn’t Affect An IUL.
At the present time, we are at historically low tax rates. It is the opinion of many tax professionals that tax rates are going to be increasing in the future, which is bad news for taxable accounts like 401ks and traditional IRAs. Contrast that with an IUL which features tax deferred growth and tax free distributions. No one’s saying you have to get rid of your 401k or IRA, but if one could balance their distributions between taxable and non-taxable accounts, one could effectively lower their tax rate. However, taxes are far from the only problem traditional retirement accounts have.
401ks, IRAs, and How Everyone Lost Over Half The Value Of Retirement Accounts, and How IULs Avoid This Problem.
Just about every investment device such as 401ks, mutual funds, iras, etc. have what is known as market risk. Market risk means if the stock market goes down say 20 percent, your investment account will lose value by that amount. IULs never go below 0. In down markets, your account balance remains the same. However, there is a trade-off. IULs are capped on the upside on average at around 14 percent. So if the market has a gain of 20 percent, you only get the 14 percent. Essentially, you trade some of the upside of the stock market for security in the down markets. In volatile markets, like what we’ve seen in the last 15 years, IULs have higher gains and less risks.
Let’s Put The Numbers To Work
In a 401k, assuming an account value of 100,000, after a 20 percent loss in the market, the account would be down to 80000, and would require a 25 percent gain to get back to 100000. With an IUL, the floor is 0. Assuming a value of 100000, 20 percent loss in the market and the balance remains 100000. If the market rebounds to 25 percent the next year, assuming a cap rate of 14 percent, the account value would go to 114000. IULs can only go up, not down. It’s easy to see the value of an IUL in volatile market years, though they’re very competitive in relatively healthy market years as well, especially when you consider all of the extra benefits you get with an IUL.
Introduction to IULs; An Alternative to 401ks, Roths, Etc.
Retirement income is something that we should all consider to secure our financial futures and not end up relying on social security. Social security truly isn’t enough, if were being honest, and pensions are out, so most people have to save for their retirement. The popular choices are 401ks, Iras, and mutual funds, but those accounts are time bombs when, not if, the market crashes. There’s a plan out there that doesn’t have this problem. This plan is not only unquestionably superior to 401ks, IRAs, mutual funds, etc. in volatile market years (like the period between 2000 and 2008) but also has the following great features:
1.) Tax deferred growth, tax free at the time of distributions, and tax free to your beneficiaries when you pass away. 401ks, mutual funds, Traditional iras, cds and money market accounts are all taxable.
2.) Never experiences the downside of the market, only the upside.
3.) Keeps making contributions for you if you become disabled.
4.) Cash value in policy can be used to pay for kids college better than 529 plans
5.) Provides long term care insurance at an older age if you have trouble with activities of daily living.
6.) Provides health benefits if you become sick or terminally ill.
7.) Completely liquid. cash is freely available after the first year of the policy, tax free. 401ks and IRAs have the 10 percent penalty before age 59 and half, not to mention taxes before and after that.
8.) No 10 percent penalty on distributions before 59 and half, and speaking of that…
9.) No 59 and a half rule, period.
10.) No income limits (Roth IRAs have limits of under $132,000 for individuals and 193,000 for married couples.
11.) No contribution limits (IRAs have limits of 5500 yearly before 50, and 6500 after that. 401ks limit $18000 contributions under 50, and 24000 over 50. Iuls have no limits.
12.) No contribution time limits – you can contribute to an iul as long as you want. 401ks and IRAs only accept earned income, and at age 70 and half, you’re required to take distributions.
13.) No forced distributions – traditional iras and 401ks require distributions at a set amount at age 70 and a half, which can make it hard to control the tax rate you’ll pay.
The Rundown
Indexed universal life insurance (IUL) is a permanent form of life insurance and very similar to regular universal life insurance, known for its flexible premiums and options to the death benefit (option a, b, c, etc). What makes IULs unique is the interest rate in the cash value of the policy is not fixed by the insurance company, but tied to a stock market index (mainly, the s and p 500). This gives the IUL a chance to make much greater gains in the cash value of the policy when max-funded.
The main takeaway from the purpose of an IUL is to trade a portion of the upside of the gains in the stock market, for a guaranteed, secure floor on the downside. If the stock market is up 25 percent, the cap rates on most iuls are around 13-14 percent. So the 401k or IRA will get the full 25 percent gain, while the iul gets the 13-14 percent. However, if the market is down by say 25 percent, the iul loses nothing, and the other plans absorbs that full loss. Overtime, the IUL Performs better and you’ll have more money in your account because it never experiences a loss.
IULs come with a few different options when it comes to how the cash value and death benefit are handled.
Option A – Option A keeps the cash value inside the policy and doesn’t add to the death benefit, and so the cost of insurance is kept to a minimum.
Option B – Option B adds the cash value gains to the death benefit, and also allows for max-funding of the cash value in the policy. The cost of insurance is higher with this option, but not too much. A full expense report will be shown in the illustration at the time of consultation.
Option C – Option C pays your beneficiaries the death benefit, plus a return of all the premium paid into the policy.
To properly design a max funded IUL policy, option b is chosen for the contribution years and then switched over to option A once contributions stop to lower the Cost of insurance. Option A and B can be switched at any time. Option C has to be chosen at the beginning of the policy on the application and can’t be changed later. Your agent can set this up for you and instruct you how to maintain it when you speak with him or her.
“Flexible” Payment Options With An IUL (Minimum, Target, And Maximum)
I’ll preface this section by saying max-funded IULs are not any more expensive to fund than traditional retirement plans like 401ks and IRAs. The insurance company gives you flexibility to pay into the policy the way you want to. However, if you are unwilling to properly fund an IUL (meaning the max-funded option), don’t bother with it. Get another retirement plan and get another life insurance plan. When it’s not max funded, there are too many chances for the policy to blow-up and end in disaster. And before you think this is a money grab on my part, understand that agents only get paid up to the target premium. Anything over that is not compensated. I digress.
Before we talk about the different payment options, it should be understood that no monthly payment is mandated per se, like in whole life insurance. The way it works is IULs have expenses to maintain the death benefit. Every retirement account has expenses, but none have an immediate, growing death benefit like life insurance. 1 for us, 0 for them. We want to keep this account alive and growing, so the premium payment goes into the cash value of the account. From there, expenses are taken out of that cash value. The remaining balance depends on the monthly adjusted interest credited to the policy, based on market performance. The goal is to make sure the account has enough cash value to pay these expenses, as well as grow over time.
Given enough time for payments, and/or with enough cash accumulated in the account, the policy can maintain itself and keep growing without the need for premium payments. Hence, no need for monthly payments, per se. However, the insurance company gives you options when you are paying premiums, and you have three options which are minimum (don’t bother), target (don’t bother), and maximum (your only option).
The Minimum Payment (Not Recommended)
The minimum payment is the minimum recommended amount to keep enough cash value in the account to pay expenses. The problem is, a minimum funded policy won’t really earn any cash value. That’s not a good retirement strategy. Not only that, but the policy will likely lapse in 10 – 15 years because expenses increase over time.
The Target Payment (Not Recommended)
The target premium is the middle option and what you pay to guarantee the policy will last to a certain point, usually to age 75 or 80 if the market performs well. Do I have to explain why that’s not a good retirement plan or death benefit? This option should only be used in times when you don’t have the money for proper payment, like say a job loss or something. I recommend against funding at target. Again, don’t buy an IUL if you can’t max fund it.
The Maximum Payment (Recommended)
The maximum is what you can legally pay for a specified death benefit before turning your policy into a modified endowment contract (more on that later). If you can’t afford to fund at the max for a specified death benefit, lower the death benefit until you can afford it. A max funded policy is practically impossible to lapse (policy ends because of no cash value). Not only that, your cash value grows at a competitive rate and even better than stocks, bonds, and other retirement accounts, forever. Now there’s a retirement strategy.
Policy Lapse (Read; Policy Ending)
For a policy to lapse, the cash value has to reach zero, either because you took too much money out, or because policy expenses superseded your contribution (impossible when max funding). If the stock market crashes permanently and never recovers again for 10 plus years or so, The policy won’t have a chance to earn interest, but then no one in any account would be earning anything. If that happens, we’d have a whole lot more to worry about than retirement savings and should probably go to underground bunkers, because the world ended.
Even If You Don’t Need Life Insurance, an IUL Is a Great, low-Risk Retirement Vehicle.
Any permanent life insurance product other than Variable Universal Life has a MUCH lower risk tolerance than any security out there (which make up the bulk of 401k, IRAs, and similar investment accounts). So for a person who has most or all of his money in the market, putting some of that money into Permanent life insurance makes for a well-rounded portfolio as far as risk and diversification go. Personal life insurance is a way to hedge risk, avoid taxes, and diversify your retirement portfolio.
Cliffs On Those Who Should Consider IULs:
1.) Life insurance provides a better legacy than any other product in the world.
2.) Great no-risk growth on savings in an account that only goes up, never down.
3.) Death benefit for heirs that never goes away (as opposed to retirement savings like 401ks, which can be outlived)
4.) A plan that will continue contributing to itself even if they become disabled.
5.) Use a portion of the death benefit to pay medical bills if they come down with a chronic or critical illness or need help with long term care and assisted living.
6.) Liquid cash anytime
7.) Pay for college without adding to the EFC (Estimated Family Contribution) for financial aid, unlike 529 plans.
IULs are good plans to fit many needs and situations. Click on the below link for part 2 of this article.
Indexed Universal Life Insurance: Quite Possibly The Best Retirement Plan Ever Part 2
Up to this point, IUls are probably sounding very rosy, and that’s because they are. However, there are some things that people should be aware of before purchasing an IUL. In this article, we’ll go over everything the consumer needs to know and how to plan accordingly with these kinds of plans. (Continue to Article)
Blue Crush Insurance
