Indexed Universal Life Insurance For Retirement Income in USA

When designed properly, indexed universal life insurance can be a great savings vehicle for investors who have a good ability to save. Indexed universal life, or IUL, is a type of permanent life insurance that allows policyholders to build cash value. The cash value can be invested in a fixed account that often has a guaranteed minimum interest rate or the owner can get his or her return based on several different equity indices.

There are several credit methods that can be used to generate a return on the cash inside the policy. The most common method I see is an annual point-to-point calculation based on the S&P 500’s return with a cap rate that protects your principal and limits your upside. When you pay your annual premiums, the insurance company deducts certain premiums for state taxes, cost of insurance, and sales loads. After charging the fees, most of your money goes into the insurance company’s general account and a small portion buys derivatives on the index you choose.

Let’s say an insurance actuator believes they can earn 5.27% on their pool of investments. They will invest $95 of your $100 in their general account with the hope that in one year, $95 will grow to $100. That way they can guarantee your principal. In my example, $5 would buy derivatives that can make up to a certain return or be worthless if the index you choose has a negative year. The cost of derivatives helps determine the cap rate or the maximum you can make per year. Most companies currently have a 10-15% cap rate on the S&P 500 index. If your insurance policy has a 12% cap rate on the S&P 500 and the index is 30%, you will have 12% credited to your account for the year. If the index does 5%, you will do 5%. If the index falls by 20%, your return for the year will be zero. You do not receive dividends for the indices you invest in.

Principal Protection

Some people are very critical of the fact that the IUL limits their upside. There is no free lunch. To protect your principal, you have to leave some upside. These critics point out that because of the cap rate, IULs would have earned between 5-8% per year over the past few decades, when the S&P 500 averaged 9-11%.

I agree that better returns are possible if you are willing to stomach the risk of owning an all-stock portfolio and my experience has taught me that very few people are able to invest when the financial world is in panic. Dalbar’s latest study was released recently and shows that the average equity investor has averaged 3.79% over the past 30 years while the S&P 500 averaged 11.06%. Even worse, the average fixed-income investor made .72% per year, which is only 1/10 of the return of the Barclays Aggregate Bond Index.

Because it’s so hard to stick with an investment plan that doesn’t work, I think a product like an IUL would be better suited to a percentage of the population that limits their benefits but provides basic protection that helps them sleep better. It’s night.

Creditor Protection

Texas law states that the cash value in your life insurance is protected from creditors. This is a very important feature for people in the medical profession and business owners. Money kept in your bank account or brokerage account is usually not safe. This may not sound like a profit to you, but consider the fact that a homeowner and tree-cutting company was successfully sued for millions of dollars because an oak tree fell on the current Texas governor in 1984. from which he was paralyzed. I didn’t know I needed to worry about the trees in my yard until I learned this.

Did you know that when you sell your car, you can be held liable for a ticket and criminal and civil liability if the new owner does not change the title of the vehicle to his or her name? It is important to accompany them to the tax office or submit the vehicle transfer notification to the DMV immediately. The more experience I have under my belt, the more I realize how risky life can be.

Tax Benefits

The cash value inside indexed universal life insurance is tax-deferred and if designed properly can be taken out as a tax-free loan that does not have to be paid back during the life of the insured (the insurance company has to pay uses some of the death benefits for the loan). The only return that really matters is what you keep after taxes and after inflation. If you’re in the highest federal income tax bracket of 39.6%, you’re now subject to an additional 3.8% Medicare surcharge on investment interest under the Affordable Care Act. If you make 6% inside your tax deferred IUL policy, that’s a 10.6% tax-equivalent yield for the highest tax bracket.

In addition to tax deferral, you can pay zero capital gains tax by borrowing against your cash value. You can borrow to buy your next vehicle, for a real estate down payment, or to fund your child’s college. You can choose to pay back these loans or potentially never pay them back. Page 27 of the GAO Report of 1990 to the Speaker clearly states, “If a policyholder borrows internal buildup from his life insurance policy, the amount borrowed is considered a transfer of capital, not a receipt of income, And therefore, it is not subject to taxation. This argument is consistent with the tax policy on other types of loans such as consumer loans or home mortgages.

Diversification

Stocks and safe government bonds often have low to negative correlations. There are very few years when both the US stock market and the US government bond market lose at the same time. However; Many people find it comforting to know that in a down stock market, they can withdraw money from their insurance policy, which has prime protection. This can be a very useful tool when one considers the risk of sequestering returns when distributing funds in retirement. Withdrawing money from stocks in a year like 2008 can seriously hamper their ability to maintain their standard of living for the rest of their retirement.

There are times when the US stock market is a poor long-term investment. The S&P 500 hit 1552 in March 2000 and was at the exact same level 13 years later due to the technical wreck in 2000-2002 and the Great Recession in 2008-2009. This was an ideal environment for indexed universal life insurance because your principal was protected during accidents and accidents made stocks cheaper, where they had a good chance of going up and hitting the cap rates on IUL policies. Was. During a long-term bull market (eg 1982 to 2000) you would expect the capped IUL policy to be worse than the return of the US stock market.

Arbitrage

When you take money out of your brokerage account or 401(k) and spend it, the money is no longer invested and doesn’t work for you. This is not the case with indexed universal life insurance. When you borrow from your policy for retirement income, the insurer is lending you money and using the cash value in your policy as collateral for the loan. This means that you can get a loan of $200,000 at 5.5% interest against the cash value of your IUL policy. If over the course of your loan, your policy pays an average rate of 6.5%, then you are making a 1% return on all money spent for your life.

Being able to put a small spread on what you have borrowed and the downside protection of the product could potentially allow you to withdraw a higher percentage of your cash value per year from volatile investments that do not have the principal security. I ran an IUL illustration on a 37-year-old male who had an average return of 6% per year by age 65 and found that he could borrow 4.8% of the cash value in the first year of retirement and reduce that initial amount to 3%. continues to increase. % every year till the age of 100%. In simple terms, arbitrage and principal protection can allow you to pull up to $48,000 in an IUL from a cash value of $1 million, indexed for inflation.

4.8% is a lot more than most financial planners can easily pull from a traditional portfolio. One of the most common amounts planners consider safe is to withdraw 4% from your investments. This is also known as the 4% rule. Retirement Researcher, Wade Pfau, recently estimated that retirees should consider withdrawing only 2.85% to 3% from their investments initially. This would mean that you should only withdraw $30,000 indexed for inflation from a portfolio of one million dollars. If Pfau is correct, having a maximum funded IUL for retirement can be a nice addition to your retirement.

Death Benefit

The ultimate benefit of saving in Index Universal Life policies is to remember that you are buying a life insurance policy. If you pay a month or year’s premium and die prematurely, your heirs can get a 1,000% return on the money you invest. If this unexpected and unfortunate event happens, life insurance is the best thing you can possibly invest in. And the best part about life insurance is that it is tax-free for your heirs.

I also like how many IUL policies have a free accelerated death benefit rider that allows you to take a portion of the death benefit while you are alive if you are critically ill. You can use part of your death benefit while you are alive to take your family on one last vacation or pay for a long-term care facility.

Disadvantages

The biggest disadvantage of IUL policies is that they usually have a surrender fee or fee for 10 to 15 years to withdraw your money. You need to fully understand and commit to the product. Products also forward load their costs and most of the examples I run at 6% don’t even break through by years 7 to 10. Therefore, applying for a policy and canceling it early is usually a bad idea.

The other disadvantage to IULs is that the cap rates can and do change throughout your ownership of the policy. Many policies only guarantee a minimum cap rate of 3% or 4%. As mentioned earlier the cap rate is a function of the cost of purchasing the derivatives. Volatility was very high in 2008 which made derivatives more expensive. I didn’t see any company drop their cap rates dramatically at the time and didn’t see it as a major risk. If for some reason your IUL has dropped cap rates near the minimum, you can switch to a different index crediting method or you can invest your cash value in a fixed account for a period of time.

Finally, life insurance examples always show guaranteed value and non-guaranteed value. It is quite possible that we will continue to operate under non-guaranteed assumptions, but if Ebola kills massive amounts of people or AIDS becomes airborne, all insurance companies will pay for insurance and administrative costs after getting approval from your state. You can increase your fee for, In this rare event, life insurance contracts will be much less attractive than policy owners expect.

Conclusion

The IUL is not right for everyone. If you design a policy that buys the least amount of insurance to get the maximum amount invested, you can add diversification to your portfolio, have tax flexibility in retirement, and get attractive after-tax returns. can do. If you want to see what saving in IUL would look like, please give me a call. We can determine the amount you want to save on the policy and then find the right policy for you based on your health history. Because I am independent and not loyal to any one company, I may shop around all IUL carriers to find the best one that meets your needs.

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