indexed universal life in

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.