The IUL Advantage – Case Study 1

I’ve been talking to a potential client and would like you to check my math and give your opinion. This woman is a healthy 37 year old with a good job who will have a nice pension when she retires, but no Social Security. She has been saving $1,000 a month in recent years and depositing it in a qualified plan, where it’s been invested in cash because she’s afraid of losing her money in the market, so it’s earning no interest. She’s single and still lives at home with her parents, so she’s getting killed on taxes, but the tax deduction helps a bit. The beneficiary of her qualified plan is her brother.

Here’s my analysis – “If you continue on your current path, you’ll save $336,000 through age 65 (not including the money you’ve saved already). You’ll earn some income tax deductions (maybe $117,600 if you’re in the 35% bracket) but that’s it.

Let’s take a look at what might happen if you earn 6% on the same money. $12,000 a year saved for 28 years at 6% will grow to $822,337. But there are two questions –

1. How will taxes affect you later?

2. Where can you safely earn 6%?

Let’s talk about taxes first. If you stay on your current course and have $336,000 (plus your previous savings) for retirement and take out just the recommended minimum distribution (1/21 at age 65) to supplement your pension, that’s $16,000 per year, with all of it taxable. That’s about $5,600 in taxes, leaving you about $10,400 per year from all your years of savings.

Assuming you can find an approved investment for your qualified plan that earns 6%, your $822,337 will pay out at $39,158 per year, all of it taxable. 35% taxes will eat up $13,705, leaving you with $25,452 per year, net.

One other thing, if you were to die before reaching retirement, your brother would receive the balance in your account and MAY be taxed in the year he receives it as regular income, resulting in a huge tax bite.

But, do you know of any investments that are approved for your particular qualified plan that will consistently yield 6% without risk of loss? I only know of one that gets close. An indexed annuity with an income rider. Using one of these can achieve that last scenario with costs of less than 1% per year. You can even reduce the tax bite by putting $5,500 a year into a Roth IRA because the future payouts from the Roth will be tax-free. This strategy will get your retirement income up to about $30,000 per year, net.

But there is one other strategy that we have discussed, the Life Insurance Retirement Strategy. Using an IUL (indexed universal life policy) the way we have discussed, you would only put HALF your future savings into the IUL ($500 per month through age 65) without fear of market losses, then you could take $70,000 per year TAX-FREE for life (assuming the S&P 500 performs the way it has for the last 30 years and based on the expected cost of insurance and fees for a healthy 37 year old woman). That’s more than double the results from half the savings! (you could still put the other half of your savings into a Roth and increase your tax-free distributions even more!)

On top of this, if you die before reaching retirement (or after), your family would get at least $511,417, income tax-free.”

What do you think? Should she –

A. Continue putting $1,000 a month into a qualified plan earning nothing?

B. Put $500 into a Roth IRA and the other $700 into the existing qualified plan, with both accounts going into an indexed annuity that earns a guaranteed 6.75% with the income rider at a cost of less than 1% per year (and also gets a bonus of 10% on all premium deposited in the first 7 years)?

C. Put $600 a month into the Life Insurance Retirement Plan using an indexed universal life insurance policy (IUL) and max fund a Roth IRA?

D. Do something else?

Keep in mind that this client is very risk-averse, so stocks are not a good choice for her.

I welcome your opinions.

Michael Goodman

Life Insurance Agent, Santa Clarita, California

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