index universal life insurance

Has Your 401K Become A 201K?

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Has Your 401K Become A 201K?

On September 22nd, the Dow Jones Industrial Average fell another 390+ points.  Proposals by President Obama have fallen flat and nobody was impressed by the latest moves by the Federal Reserve.  The U.S, Congress has not come up with a plan of their own and it appears unlikely that any plan could be passed given the inability of Democrats and Republicans to compromise on anything these days.  There is no functional leadership in control of the Nation.

Our future looks even bleaker when you consider that most of the Republican candidates for President look like extremists that will be difficult for many Americans to support at the polls next year.  If the Republicans don’t beat Obama next year, we’ll be in worst position than when he took office in early 2009.  He’s already shown that he has no answers for the problems of the country and has even less ability to get his ideas passed.

As a result of all this, your retirement accounts have probably been dropping lately.  Interest rates are at record lows, so money placed in savings accounts and CD’s have never earned a lower rate of return.  Many accounts invested in stocks or bonds have been subjected to extreme volatility and may be on the way back to levels seen at the worst times of 2008.  Is there anything you can do to protect the money you’re going to need for your retirement?  Yes, depending on your age, there are two possible solutions.

If you’re within 10 years of retirement, a retirement annuity may be just what you need.  You’ll need to talk to a licensed life insurance agent to be sure, but a fixed or indexed annuity can offer the safety and security of bank accounts and CD’s while offering a much better rate of return.  Best of all, it’ll provide a guaranteed income for life when you retire, no matter how long you live.  Most retirement accounts can be invested in a retirement annuity, but please understand that they are not for everyone, so make sure you work with somebody you can trust.

If you have more time, or are actually just starting out, it might be better if your retirement account was an indexed universal life insurance policy.  This is probably the most misunderstood financial tool of all but, in recent years, these policies have outperformed many stocks-oriented funds and indexes while offering a guaranteed floor that protects you from loss due to market fluctuations.  For many people, this is the best of both worlds (safety with good returns), but it has a very big kicker – if set up properly, an indexed universal life insurance policy can fund your retirement with a TAX-FREE income for life!  Yes, it’s true that money invested in your “qualified” plan (IRA, 401k, etc) gets a tax deduction in the year it’s invested but, if you do the math, you find that the tax break you got while working is quickly offset and more by the tax-free income you can get from a life insurance policy.

If this is news to you, then you need to speak with your life insurance agent ASAP.  If you live in Southern California, give me a call (714-585-2371) or send me an email (EquityIndexLife@gmail.com) and we’ll have a private conversation with no obligation for you to buy anything.

401(k) Retirement Accounts Or Indexed Universal Life Insurance?

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Please note: I have updated this article with the following two articles –

The Advantages and Disadvantages of a 401k

The Advantages and Disadvantages of an IUL

401(k) Retirement Accounts Or Indexed Universal Life Insurance?

Many Americans face a difficult choice when planning for their futures.  The government has endorsed the use of individual retirement accounts (IRA), the 401(k) plan, and other “tax qualified” retirement accounts as vehicles to build cash value that can be used in retirement to supplement our savings, home equity, and social security earnings.  But relatively few people are considering the use of indexed universal life insurance for the same purpose.

You don’t have to look hard to find people who believe that “you should only buy term insurance” and “insurance can’t fund your retirement”, especially since insurance is paid for with after tax dollars.  All of the tax qualified retirement accounts allow money to be deposited tax free in the year they are earned.  So the question is whether or not there’s any reason to even consider indexed universal life insurance for retirement purposes.

Let’s look at the arguments in favor of life insurance but keep in mind that I’m a licensed seller of real estate and life insurance.  I’m not an accountant, a lawyer, or a securities dealer.

1. Permanent life insurance (whole life, universal life, indexed universal life, etc) builds a cash value over time that grows tax-deferred, similar to the qualified retirement accounts.

2. If you die before reaching age 100, life insurance provides a tax-free payment to your beneficiary.  With the qualified plans, if you are unmarried, your 401(k) is often taxed as regular income to your beneficiary in the year received, a huge tax burden.

3. The cash value that builds in permanent insurance is an asset that can be accessed free of income taxes or penalties using zero-cost policy loans.  The loan does not need to be repaid until you die.  These loans can be used for any purpose, such as college expenses for your kids, car repairs, vacations, etc.  Funds in  qualified retirement accounts normally cannot be accessed prior to age 59 1/2 without incurring a 10% penalty and income taxes.

4. Premiums for indexed universal life insurance can be increased to allow the cash value to grow larger and faster and there are few limitations on the amounts.  In many tax qualified retirement savings plans, there are limitations to how much you can deposit.

5. The cash value in a life insurance policy can grow without any requirement to take money out.  This gives you the option to let your funds build.  In qualified plans, you are required to take out a minimum amount beginning at age 69 1/2 and every year thereafter.  The government doesn’t want to wait for its share.

6.  When you use the cash value for an income stream in retirement, you will normally receive the money free of income taxes.  When using a qualified plan for retirement, the income is fully taxable by the state and federal governments.  Some people think that the tax deferred status given to their deposits is a big deal but, if you do the math, you’ll find that the meager taxes saved prior to retirement are often paid back in less than four years in retirement. In addition, most retirees have fewer tax deductions since the kids have left and the house is paid off or has a low balance.  If you live a normal lifespan, you’ll find that you’ve paid $100s of thousands of dollars more in taxes than if the same money had been put into a life insurance policy.

7. The cash value in an indexed universal life insurance policy grows with little risk.  The growth in these accounts is normally tied to an index like the S&P500.  When the market value goes up, your account goes up (to a cap).  When the market goes down, your account stays the same (it has a floor).  You cannot lose value due to the market and you never need to make any decisions about the account.  During the “lost decade” from 2000 to 2010, when the S&P500 essentially stayed flat, users of indexed life accounts earned an average of over 9% per year because they only participated when the market went up, not when it went down.  Use of a qualified plan requires the worker to either become an expert on investing or trust his account to the skills of strangers.  Since the market has often gone down in recent years, this means the balances in many retirement accounts has gone down by large amounts.  This can be devastating to somebody planning to retire soon.

8. When properly set up and funded, an indexed universal life insurance policy will provide a tax-free income for life that does not vary.  Many users of qualified plans have found that their accounts do not provide the income they hoped for (either because the balance did not grow as much as they expected or they underestimated the income tax burden), or the money runs out before their life does, requiring them to find jobs at places like Walmart and fast-food restaurants, where they are much older than their co-workers, or to rely on family or charity to make do.  This is a tragedy that is happening to more people every year.

So, what do you think? Have I been unfair to the qualified retirement accounts?  Are there benefits to using a 401(k) that an indexed universal life insurance policy does not have?  Please add your comments and opinions down below.

 

 

 

 

 

 

Why You Need Indexed Universal Life Insurance

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“The Million-Dollar Matrix: Save a Million Dollars by the Time You Retire

by Stanley Greenfield, RHU (originally published in Dynamic Chiropractic – March 12, 2010, Vol. 28, Issue 06)

I ran some numbers recently to see what it would take to accumulate a million dollars. I call this the Million-Dollar Matrix. If you are age 35 and could earn 8 percent per year, you could build a fund of $1 million by age 65, if you deposited $667 per month. Thirty years to build $1 million, assuming you have put the money in a qualified retirement plan, since there are no taxes due every year on the interest earned.

If you are age 45, you would have to save $1,686 per month at 8 percent interest to accumulate $1 million by age 65. Twenty years to $1 million. This also assumes you are using a qualified plan to avoid taxes during the accumulation period.

OK, so you have accumulated $1 million in a retirement plan. Now what? Well, you kick back and retire with an income stream for the rest of your life. But wait: Since you did not have any taxes to pay on the interest earned during the accumulation period, now the IRS wants their “fair share” or whatever you want to call it.

To keep things very simple, let’s assume your tax rate is just 30 percent. Based on that, if you took out the 8 percent earned on your $1 million every year, that would be $80,000 per year, gross. That means before taxes. Less 30 percent for taxes ($24,000) leaves you a net of $56,000 annually.

If you are age 35 when you start this plan, with a deposit of $667 per month, or $8,004 yearly, your tax savings at 30 percent would be $2,401 per year. Over the 30 years to age 65, that would total a tax savings of $72,030. Based on the fact that at age 65, your tax liability on your retirement income of $80,000 per year is $24,000 per year, you would pay back all your tax savings in just three years. If you live to just age 80, your total tax liability would be $360,000. If you are lucky enough to live to age 100, your total tax liability would be $840,000. There would probably also be an estate tax due on the balance left in the retirement plan when you die.

If you are age 45, with a monthly deposit of $1,686 or $20,232 annually, your tax savings would be $6,070 per year, or $121,400 to age 65, assuming a 30 percent tax bracket. The plan would then pay you $80,000 per year, or $56,000 net after taxes. With a $24,000 per-year tax due, it would only take a little over five years to pay back all of the tax savings.

It just doesn’t seem fair to have to pay all those taxes once you retire. Are there any alternatives that can work better? Yes there are. How would you like a plan that allows you to accumulate your funds with no limits on what you can deposit into it and no requirements to make any deposits for any employees? Does any such plan exist? Actually, it does; it is an insurance product called “indexed universal life” that has within it a portfolio of indexes, such as the S&P 500, Dow Jones Industrial Average, NASDAQ 100, S&P Mid Cap 400, Dow Jones Euro Stoxx 50, and the Russell 2000. You can pick and chose the ones you want, or use a mix of all of them, and change them at any time with a phone call. You only share in the gains, not the losses. Quite a unique product.

There aren’t many companies that issue indexed universal life, but it can be quite effective, especially if you over fund it with extra cash that goes in basically untouched. That is why this plan builds so much money. You can get to this cash anytime you want. There are no restrictions like they have on retirement plans. The cash builds up with no current tax liability, and you can take it out with no taxes to pay. In many states, if you get sued or file for bankruptcy, no one can get to this money.

Let’s see what this will accumulate. At age 35, with the same deposit of $667 per month, at age 65 the plan could yield a retirement income of $76,200 per year to age 100. That totals more than $2.5 million. At age 45, the plan could yield $71,000 per year to age 100, for a total of more than $2.414 million. No tax savings on the annual deposits to age 65, but also no taxes due on the retirement income. Not a bad trade-off, with quite an increase in the annual retirement income when compared with a qualified retirement plan. Since these plans are life-insurance products, they also have a death benefit that would be payable to your beneficiaries at death.

Why would anyone want a regular qualified retirement plan? Maybe they like the fact that they have fees to pay every year and are required to include all employees, including the ones they wished were “ex” employees. Apparently they also enjoy dealing with the IRS and the changes that take place in plans almost every year. Does that sound like you? I didn’t think so. Talk to your financial consultant for more information.”

You can get more information about indexed universal life insurance products in Southern California by calling Michael Goodman at 714-585-2371 or sending an email to –

equityindexlife@gmail.com