Indexed Universal Life Insurance (IUL): Flexibility and Safety
In IUL you get the flexibility of adjustable life insurance premiums and face value and an opportunity to increase cash value—would you go for it? You can get this without the downside risk of investing in the stock market. All of this is possible with an indexed universal life insurance policy created for both, no risk savings and life insurance. This combination of flexibility and investment growth can be a good fit for you if you are looking for supplemental retirement income.
Indexed universal life (IUL) allows the owner to allocate cash value amounts to either a fixed account or an equity index account. Policies offer a variety of well-known indexes such as the S&P. IUL can be fixed or variable. We do not deal with variable IUL because retirement income should not have any risk of losing principal. IUL policies offer tax-deferred cash accumulation for retirement while maintaining a death benefit. IULs are considered advanced life insurance products in that they can be difficult to adequately explain and understand.
What’s Good About an IUL Policy?
- Low price: The policyholder bears the risk, so the premiums are low.
- Cash value accumulation: Amounts credited to the cash value grow tax-deferred. The cash value can pay the insurance premiums, allowing the policyholder to reduce or stop making out-of-pocket premiums payments.
- Flexibility: The policyholder controls the amount risked in indexed accounts vs. a fixed account, and the death benefit amounts can be adjusted as needed. Most IUL policies offer a host of optional riders, from death benefit guarantees to no-lapse guarantees.
- Death benefit: This benefit is permanent, is not subject to income or death taxes and is not required to go through probate.
- Less risky: The policy is not directly invested in the stock market, thus reducing risk.
- Easier distribution: The cash value in IUL policies can be accessed at any time without penalty, regardless of a person’s age. If your cash value is substantial, you may start your retirement distribution before retirement age.
- Unlimited contribution: IUL policies have no limitations on annual contributions.
What’s Bad About an IUL Policy?
- Caps on accumulation percentages: Insurance companies sometimes set a maximum participation rate that is less than 100%.
- Better for larger face amounts: Smaller face values don’t offer much advantage over regular universal life policies.
- If the index goes down, no interest is credited to the cash value. With the IUL, the goal is to profit from upward movements in the index.
Diversify Your Money for Safety, Access, Control of your Finances and Tax Preferred Cash Flow
If you would like to say good-bye to putting all of your money at risk in the stock market and potentially getting a significant reduction in retirement cash flow due to rising taxes, then Indexed Universal Life Insurance is a right tool for you.
IUL will allow you to have protection from market volatility and tax increases so you could create more cash flow now and in retirement lasting your entire life.
It can help you to achieve your financial goals without worry about market volatility and rising taxes. This isn’t the type of life insurance you hear famous radio talk hosts talk about.
We build it differently. The conventional way usually includes excessive fees for most people and big commissions paid to insurance agents. Of course, any plan has costs and fees; however, our goal is to reduce those to the lowest guideline level so we can maximize the amount of growth in the insurance policy.
Over time, this could be one of the most profitable assets in your portfolio if built and used correctly. It is one of the most effective and favourite financial vehicles.
CREATE RETIREMENT CASH FLOW FOR LIFE:
REDUCE YOUR TAXES
If you listen to TV and Wall Street “experts,” you’ll hear a lot about maxing out your 401(k) and IRA contributions in order to get a tax deduction and grow your money tax-deferred. Of course, it makes sense for some to have a 401(k). Yet, could it also make sense to use a portion of your money to diversify against market volatility and rising taxes?
Knowing taxes are likely to be higher in the future, why would you trade in a lower tax rate today for a future rate that could be much higher when you need the money most? Even if taxes don’t go up, deferring taxes to the future can cost you 3 to 5 times more at withdrawal than you save by getting a tax deduction during your working years.
Simply look at the math. Here we’ll use a hypothetical example to compare paying taxes today, and creating tax-advantaged retirement cash flow, to deferring taxes to the future:
In this example, let’s say you contribute $5000 per year for 30 years. With a 401(k) you paid no taxes on that money. On the other side, you would have paid tax at your normal income tax rate, let’s assume 33%.
With the Tax-Advantaged life insurance policy, you would pay $49,500 in taxes ($1650 per year x 30 years).
In this example, when you retire you’ll have $498,300 in the tax-deferred plan or $333,900 in the tax-advantaged life insurance policy.
You’re probably thinking, “This is a no brainer—I’ll take the tax-deferred plan with the bigger balance.” But there is a catch. Let’s say you take out $73,000 a year to live on during retirement. Assuming your money is still growing at 6.5%, you can take $73,000 a year for nine years. However, each year you will have to pay $24,090 in taxes on that money.
That means you could end up paying $216,810 in taxes vs. $49,000 with the tax-advantaged life insurance policy.
And this assumes taxes never go up.
That is why it might make sense for you to diversify against the potential of rising taxes using a tax-advantaged indexed life insurance policy. It is definitely not for everyone, but more and more people are starting to use this strategy every year due to the benefits.
CREATE CASH FLOW
One thing you will hear from the media today is the importance of growing the biggest nest egg.
On the other hand, more money doesn’t always mean you will have enough to last you throughout your life. Many wealthy people will tell you it is not only about creating the largest nest egg.
It’s also about creating cash flow.
In fact, INCOME, or ”cash flow,” is the new and correct focus for true financial independence.
Let’s analyze the 4% rule.
Let’s say you have a 1million-dollar nest egg and want this to provide an income for life… (1 million may be well out of reach for many Americans, but let’s take a best case scenario and assume we’ve got a million to work with).
The 4% rule says you should be able to take 4% of your nest egg in income and have it last for the rest of your life.
Well, 4% of $1,000,000 is $40,000. You still have to pay tax on this because it’s more than likely in a 401(k) or IRA. Assuming tax rates are the same, you will pay 15% federal and about 6% state, unless you live in a state with no income tax.
That puts you at about $31,600 or just over $2600 per month. For many Americans, this wouldn’t be that attractive.
Now, what happens if the $1,000,000 takes a 30% hit during a market downturn during your retirement? Now you’ve got $700,000. Now your monthly income is down to $1,843. It doesn’t sound impressive…
That’s why the 4 % rule could be broken.
The reason why the 4% rule doesn’t work is because of something called “The Sequence of Returns.”
Your nest egg and retirement income can vary greatly depending on whether the market goes up or down in the first couple years of your retirement. For example, if you take the exact same sequence of returns, with some ups and some downs, starting the sequence with your withdrawals in an up market (high early returns), your money would last 37 years. If you started withdrawals in a down market (low early returns), your money would only last 24 years.
This means your retirement could have run out 13 years sooner.
So following the “Nest Egg” retirement strategy, you are simply “hoping for the best”. Hope is not a strategy for retirement years.
If you are one of the unlucky ones to retire in a down market, it could be costly.
To just make a certain “income level” is not sufficient. More important to generate a passive income that your family is able to live on should the worst happen.
That’s why the discovery of the tax-advantaged life insurance policy based on the index strategy, was the turning point because it isn’t only hoping anymore. Now you have a peace of mind that your money wouldn’t be lost when the market went down, could grow tax-deferred and could provide you with supplemental tax-advantaged cash flow.
If you do research online, you may find some of the negatives on this method. Here is the shocking truth: most of them are true… if you build this plan incorrectly, don’t fund it correctly over time, and don’t use it properly.
Market volatility seems to be more present today than ever before. In the past 15 years, we had two of the biggest downturns in history. With how connected the world is today, volatility is most likely here to stay.
Now some people say, “When you are young, you can afford to take losses because you have time to recover.” They claim that losses, when you are young, are okay; they don’t hurt as bad as they do when you are older.
Losses on all of your money can hurt. Losses can be especially costly the younger you are because of the opportunity cost. You lose the ability to have that money working for you for the rest of your life.
Take a look at the real cost of a $50,000 stock market loss. (HINT: It’s not just $50,000)
Let’s say you lose $50,000 in a market downturn when you are 45 years old. And, let’s assume you could have averaged 7% over the next 20 years (which you can in our strategies).
How much did you really lose by the time you retire at the age of 65?
That $50,000 loss really cost you $193,484.
But that’s not where it ends. Because you still have another 20 or so years to live in retirement.
Let’s assume you live to age 85.
That $50k loss just cost you $748,722 dollars.
Your loss didn’t just cost you $50,000. It really cost you three-quarters of a million dollars!
That’s why Warren Buffet’s rule #1 is “Don’t Lose Money”.
We encourage you to beware of this type of thinking: “Don’t sell! Be patient and your money will come back.”
This type of thinking promotes the idea that, after market crashes, if you just hold on, you will eventually “recover” your losses… that the money you lost will magically show back up in your account.
This may make sense for a portion of your money. We encourage you to ask if it might make sense to diversify a portion of your money to protect against market volatility and downturns.
When you have a loss, take our $50,000 in this example, it’s gone. And it’s not coming back.
Wall Street doesn’t put a deposit back into your account. If your account does recover to the amount before the loss, it happens because the principal left in your account grew enough to replace the amount lost. Recovering significant losses can take anywhere from two to six years on average.
Often people celebrate getting back to even like they won the lottery. Talking heads on TV pat each other on the back and celebrate the “new market high”. If your money was really growing, you’d be experiencing new market highs virtually every month and year.
Getting back to even is better than continued losses, but the real question is how much more money would you have today if you didn’t lose the initial principal in the first place?
(Keep in mind, people often continue contributing to their accounts during the “recovery” period. They mistakenly think they have recovered their losses when they themselves have contributed substantially to the recovery.)
Contact us to get a free, no-obligation consultation where you’ll discover a unique strategy that gives you the potential for gains and never losing in another stock market crash.