indexed universal life insurance

The IUL (Indexed Universal Life) Versus Qualified Plans for Income

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by Michael Goodman

The 400% Solution:

 This may be the most important post I’ve added to this website. If you are making regular deposits in a “qualified” retirement program – a 401k, a 403b, 457, TSA, or traditional IRA – and IF the purpose of these deposits is to build a retirement income, then you MUST read this carefully.

The following comparisons will show the amount of after-tax retirement income you can expect to build by making deposits to a qualified retirement plan from different ages, then we’ll compare that income to the tax-free distributions you might get from an IUL (indexed universal life insurance) policy.

The Parameters

In each example, we’ll assume the qualified plan will earn 8.39% interest from start through age 90 (8.39% is the 30-year average of the S&P 500 index), even though few people actually earn that high a rate in their qualified plans (the mutual and money-market funds typically offered in qualified plans also do not average that much over long stretches).

We are also NOT assuming any matching funds because the trend for this is downward, and every company has its own policy on whether to add matching funds or not. The IUL will also assume that the performance of the S&P 500 will continue as it has for the last 30 years, but will have a floor of 0% in any year and a cap rate of 14.5%. However, NONE of the examples given are guaranteed.

The 25 Year Old

If you start a 401k or other qualified plan at age 25, depositing $200 a month through age 65, you’ll have $782,113. If you assume the same rate of interest through retirement as you had during the growth years (8.39%), and expect to die by age 90, you can withdraw $74,783 a year assuming you are trying to hit $0 on the nose. HOWEVER, if your money earns less in retirement, or if you live longer than expected, you will run out of money too soon. ALL advisors will tell you that withdrawing 9.56% of your qualified money each year is too aggressive. For many years, it was believed that a 4% draw rate was a safe rate. But current research indicates that even that rate may be too aggressive, especially if you experience a market crash early in retirement. So, most advisors now recommend withdrawing just 3% per year (see article here).

If you withdraw 3% per year, the expected income becomes $23,463 per year, all taxable unless it’s from a Roth. If you’re just in the 15% federal tax bracket, this amount will be reduced to $19,944 per year. Keep in mind that most qualified plans will not average 8.39% growth for life and, if you have other income, you may be in a higher tax bracket; and either of these will reduce your after-tax income.

By comparison, if you put the same $200 a month into an IUL through age 65 and benefit from the exact same market performance, you can start taking tax-free distributions of $92,850 per year (if you are a woman; a man would receive a little less) for life, regardless of how long you live, PLUS your heirs will receive a tax-free death benefit when you die. This example also assumes that future performance of the S&P 500 will mirror the past performance, which probably won’t happen. If the S&P 500 does not perform as well, your distributions from the IUL will be lower; however, if the S&P 500 does better than it has, your distributions will be higher. But, if the market performs as projected, the tax-free distributions from the IUL will be 465% higher than the after-tax distributions from the qualified plan (396% higher than a Roth).

The 35 Year Old

If you start at age 35 and put the same $200 a month into a qualified plan to age 65, then begin distributions at age 66, your money should build to $323,765. 3% of this is $9,713 per year before taxes. If the tax rate is 15%, then you get $8,256 after taxes.

If the same money went into an IUL and the market performs as expected, a woman may be able to take distributions of $35,994 per year, tax-free. This is 436% higher than the qualified plan and 371% higher than a Roth.

The 45 Year Old

If you start at 45 and put the same money into a qualified plan through age 65, you should have $123,680. 3% of this is $3,710 per year before taxes, $3,154 after taxes at 15%.

The IUL for the 45 year old woman produces $13,273 per year, tax-free. This is 421% higher than the qualified plan and 358% higher than a Roth.

THE 55 YEAR OLD

The qualified plan for the 55 year old builds to $37,396. 3% is $1,122 per year, $954 after taxes.

The IUL produces $3,205 per year, tax-free. This is 336% higher than the qualified plan and 286% higher than a Roth.

CONCLUSIONS

At most ages, an IUL will produce significantly higher after-tax retirement distributions than if you put the same money into a qualified plan or a Roth. ALL options produce a lot less income if you don’t get started early! While all options are affected by the growth of the stock market, money in an IUL is guaranteed not to go down because of the market. Is your qualified plan protected from drops in the market?

There are many more caveats and qualifications that I go through with clients. If you have questions about any of this, please let me know.

IUL or 529?

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Is an IUL or 529 Plan the Best Way for Parents to Save Money for Their Child’s College Education?

by Michael Goodman

A 529 plan offers tax benefits to help you save money for your kids college education. 529s typically offer an immediate tax deduction and income tax deferral and some don’t (depending on the state you’re in). Most require that the money be spent on educational expenses or there will be a tax penalty. Most importantly, when the kid finishes school, the money is normally used up. I’m going to tell you now about one of the greatest financial tools you will ever see or hear about so you can decide whether an IUL or 529 is better for this purpose.

The Better Way

An IUL (indexed universal life insurance policy) for a child gives you the opportunity to leverage a small amount of after-tax money while your child is a child into a LIFETIME of tax-free financial benefits. To maximize the benefits for college, the policy should be bought ASAP after the child’s birth. There is no medical exam needed; the child just needs to be born healthy. These policies are issued very quickly.

Obviously, the chances of a young child dying is very small, thus the cost of insurance is extremely low. Part of the money you pay into the program will cover this cost of insurance plus any fees, and the rest will go into the cash value account. Like any other IUL, the growth of the cash value will be tied to the growth of a stock market index that you will choose, most often the S&P 500. Please note that your account is not actually invested in the market, the growth rate is simply determined by the market.

When the index goes up, your account will earn interest. When the index goes down, you will be protected by a guaranteed floor of 0%. Your cash value can NEVER go down because of the market, making this a very safe place to put money. To pay for this floor, there will be a “cap” to how much of the market growth can be credited to your account. If the cap is 14% and the market goes up 10%, your account will earn 10%. If the market goes up 20%, you will earn 14%. If the market goes down, you will earn 0% and your cash value will stay the same. With a cap of 14%, your cash value will grow somewhere between 0 and 14% every year, after the cost of insurance has been deducted.

A LIFETIME of Financial Benefits!

How does this work out? Assuming the market continues to grow at its 30 year average rate of 8.39% and you put just $100 a month into the account through age 18 (then STOP), you should have tax-free access to $10,000 a year for each of four years of college, PLUS a $50,000 tax-free distribution at age 35 (house down payment?), PLUS a tax-free distribution of $250,000 at age 55 (pay off or pay down the house?), PLUS tax-free annual distributions FOR LIFE of over $200,000 a year starting at age 67! On top of this, the death benefit will have gone up from $115,000 at issue to over $1.6 million at age 66, with no additional out of pocket cost.

These distributions are just examples and are not guaranteed. There are a million variations on when and why you might take the tax-free distributions. We assume that the parent (or a grandparent) will buy the insurance for the kid and will own the policy until they believe the child is ready to take over ownership of the policy.

Can you deposit more than $100 a month into one of these policies? Yes, to a limit.

Does the child have to be an infant? No, but to maximize the growth, should be as young as possible.

Is the growth guaranteed? No, it will depend on the growth of the index tied to the account.

Are there any other catches? Yes. Two people –  parents or grandparents –  must have a life insurance policy with the same company. It can be a term policy, whole life, or IUL.

Any other questions?

The IUL Advantage – Why You Need an Indexed Universal Life Policy

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The IUL Advantage

With an indexed universal life insurance policy (IUL), you make premium payments like any other life insurance policy. Part of the premium pays for the cost of insurance and other fees, and the rest goes into a cash growth account. Universal life insurance was created in the late 1970’s as a vehicle for tax-deferred cash growth.  With an indexed universal life policy, the growth of the cash value is TIED to the growth of an index, frequently the S&P 500, but is not actually invested IN the S&P 500. When the index goes up, the cash value in the policy goes up, up to a Cap Rate (10-14.5%). When the index goes down, the cash value in an IUL stays the same because the account has a floor rate of 0%.  So, if the market goes up 10%, your cash value goes up 10%. If the market goes up 20% and you have a cap of 14%, your cash value goes up 14%. But when the market goes DOWN 15%, your account stays the same. There are never any losses due to the market. Tax-free distributions are received as policy loans. Standard loans are usually “wash loans.” The loans are secured by the cash value, which continues to grow at a fixed rate and offsets the interest charged for the loan. Variable loans are also available, where the loans are made at 4-6% interest, but that interest is offset by the indexed growth, which may be higher than the interest rate charged, allowing for extra growth due to arbitrage.

IUL’s have many advantages over other tools for saving money, especially when it comes to retirement savings. Here are the most important advantages –

1. Flexible deposits without annual limits.

2. Indexed growth – When the market goes up, your account goes up. When the market goes down, you don’t lose money.

3. You never lose money because of market losses.

4. Access to your money without income taxes or early withdrawal penalties at any age.

5. Tax-free distributions for life.

6. Living Benefits – Money to help pay costs related to chronic illness, long term care, or a terminal illness. This money comes from the death benefit, not your cash value.

7. A death benefit that pays income tax free to your family or other heirs.

8. During the most recent 30 years, the S&P 500 grew at an annualized rate of 8.39% (not including dividends). Using the index strategy in an indexed universal life insurance policy during the same period (with a cap of 14.5%) produced a rate of growth of 8.6% (after deductions for the cost of insurance).

Every IUL is custom made for my clients. Would you like to know what an IUL can do for you?

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Michael Goodman

Life Insurance Agent, Santa Clarita, California