Why Indexed Universal Life (IUL) May Be a Good Choice
The life insurance industry finally figured it out with indexed universal life (or IUL) policy. This permanent life insurance product is vastly superior to whole life, universal life, and variable universal life.
With an indexed universal life (IUL) policy, you get the upside of an index, like the S&P 500, but you are guaranteed to never have a negative return. In fact, many people who don’t want or need any more death benefit protection from life insurance are still buying this product. Why?
- Historical returns north of 7%
- Money grows completely tax-free
- Access to tax-free income at any time
- No contribution limits
- Totally liquid
The driving force here is taxes. There are only three products that you can enjoy completely tax-free in the United States, and those are:
- Roth IRAs – with a max contribution of 6,000 a year, but unless you make over $193,000 per year, then you can’t have one.
- Municipal Bonds – you might get a 3% return today, which won’t even beat inflation, and also keep in mind that municipal bond income does not avoid alternative minimum tax (AMT) and can increase the tax you pay on any Social Security income.
- Cash Value Life Insurance – like an Indexed Universal Life policy.
Looking at historical trends, we are currently in a low tax environment, with the top tax bracket sitting at just 37%. Since the income tax was implemented with the Revenue Act of 1913, the average highest income tax rate is approximately 58%.
With any other retirement product, you’re rolling the dice to see what tax bracket you’ll be in 10, 15, or 20 years from now. With a life insurance policy designed for retirement, you pay taxes now, while we are in that low tax environment, but you will never pay taxes on that money again.
Today, approximately 92% of the tax revenue collected by the U.S. government is used to pay for only four items: Medicare, Medicaid, Social Security, and the interest on the U.S. debt. According to the Congressional Budget Office, by 2025, projections show that 100% of U.S. tax revenue will be used for these same four items. The only options the government has are to either increase taxes or reduce benefits. Which do you think is going to happen? Maybe both.
If you do the research and the math, a properly designed IUL policy will generate substantially more retirement income than a mutual fund, annuity, or a 401(k) plan. But why is that? The mortality costs and charges on a properly designed IUL policy are a lot less than the taxes and management fees on a traditional retirement product. We have analytical software that can compare an IUL to virtually any other retirement product. Unless you’re getting a consistent return that exceeds 10% a year on a taxable retirement product, which is unlikely, a good IUL policy will generate more retirement income. In many cases, the income with the IUL policy will be two to three times more than a traditional retirement product. This also assumes that tax rates do not go up.
With an Indexed Universal Life policy, you can also reduce or eliminate the sequence of return risk that you have with traditional equity investments. If the stock market drops 20%, taking money out of your equity account for your lifestyle needs would be your least attractive option. You are, in essence, selling at the low. If you had an alternative asset class that didn’t go down, this would allow your equity assets to rebound. An Indexed UL product is a perfect complement to a retirement portfolio.
Lastly, life insurance is self-completing, in that it pays for itself, which is unlike any other retirement product. Let’s assume you’re a 40-year-old guy, married with one kid. You’ve got a good job and are finally starting to contribute to a 401(k) plan. If you keep funding your 401(k) for the next 25 years, you and your wife will have a pretty good retirement. Unfortunately, you die in a car accident. That big 401(k) balance in 25 years never happens. But with a simple life insurance policy, you can protect your wife’s retirement, as well as your family’s lifestyle. To win a Super Bowl, you need a good offense and a good defense (and don’t forget the defense).
Check out this handy Global Atlantic infographic to learn more: