How Does Indexed Universal Life Legally Cut Out The Taxman In Retirement?

Most investors don’t know about the best IRS-approved retirement savings plan that the life insurance industry has right now, but it’s the best one out there.

This retirement savings plan is:

• It is not a company-sponsored, pre-tax qualified, 401(k)-type plan.
• It is not a Roth IRA.
• It’s not a Roth.
• In this case, it is not an annuity, nor is it a whole life insurance plan.

No one knows about Indexed Universal Life (IUL), even though the top 39 carriers surveyed made more than $1 billion in sales in 2011 alone.

The Advantage of Indexed Universal Life

To understand why IUL is a great way to save for the future, we need to start with the fact that qualified plans, which are made up of equity-based investments, are widely seen as failing after a generation of use.

IUL is a great way to save for the future for people who:

1. Don’t have 401(k) plans at plan
2. Or who don’t trust the market

Because this is the case. Because qualified plans haven’t worked well, that’s the first thing to say.

Most investors haven’t made money in the stock market for a decade. It has been a long time since investors have made money. They haven’t made money since before Google existed, before the events of 9/11.

The second reason is that employees don’t do their jobs well. People don’t save because they’re afraid of losing their money, no matter how bad the market has been since 2000.

Many people, especially people in their 20s and 30s, are afraid to save in the stock market because of the recent stock market drops, even though the market has long been the best place to save for the long term.

401(k): Why It Is A Bad Idea To Keep Your Retirement Savings

• The 401(k) retirement account has long been the first thing people think of when they need to save for retirement, but this is a mistake. Stephen Gandel wrote an article in TIME magazine about “Why It’s Time to Retire the 401(k)” in October 2009. In fact, Gandel’s idea has been around for 14 years now, and it’s not very new.
• The bad news is that the 401(k) is a bad idea, a bad financial mistake, and a bad place to keep our retirement savings.

What’s the answer then?

The answer: a new type of insurance. As it turns out, we need insurance to protect our retirement savings, which is why we need insurance.

Insurance helps us protect ourselves from risks we can’t recover and can’t afford to deal with on our own, like when the market goes down. Many people are willing to give up the flexibility of a 401(k) in exchange for a certain amount of money.

Health, home, and cars are some of the things you’re likely to insure. Why not protect your safe, comfortable retirement from the risks we can’t foresee and can’t afford to recover from on our own?

And why not cut out the taxman in the process? This is called a pension.

These are all legal, and completely above board, life insurance rules. It may sound like it’s too good to be true, but that’s what life insurance is and does.

The general public and even many financial advisors don’t know that for 14 years, Congress has been approving a way to pay no taxes, keep your money safe from market risk, and keep your gains safe from taxes.

Most people like Indexed Life because it lets them keep all their gains and not have to deal with the market’s losses like a Roth mutual fund. But there are many more benefits that no other investment can legally offer, except for a Roth.

Basics of Indexed Universal Life (IUL)

I’ll also show you a rough math equation to show you how powerful this retirement savings tool is.

Indexed Universal Life’s main ideas:

1. It can be paid for with after-tax money or before-tax money, like in a pension plan.
2. Because assets are backed by a company’s full faith and credit, they aren’t going to lose value in the market. Insurers have “legal reserve” rules that apply to their funds even though they are not FDIC-insured.
3. Assets are “tethered” to the stock market through the chosen index. This could be the Dow, the S and P 500, the Global, or a mix of several indices.
4. It’s important to note that any real, interest-bearing gains (subject to a cap) that the policy holder makes are locked in and never given back: the policyholder makes money or loses money based on the market, but never a market-based loss.
5. If you look at historical returns, which are based on real examples from top carriers going back to the late 1980s, they are usually somewhere between 7% and 10%.
6. Income can be taken out before age 59.5 and is tax-free. A withdrawal is like taking out a loan against the death benefit, which acts as collateral.
7. The beneficiary doesn’t have to pay taxes on the money they get from the death of their loved one.

Case Study

Let’s use a real client case study and an illustration to do the math. In other words, this is just an illustration, and if there’s one thing to keep in mind about an illustration, it’s that its accuracy can’t be guaranteed because it’s just a guess.

For our example, let’s use a client who isn’t real:

• They have been happily married for 16 years.
• They have two young children, ages 6 and 8.
• When Jim retires, how much retirement would he have to put away in conventional stock investments that don’t protect the benefit of the money he puts in, and that aren’t tax-free?

Here are some rough numbers for you to look at:

• They can afford to finance the Indexed Universal Life account with $1,666.66 (totaling $20k per year) by the automatic bank draft from his institution to the insurance firm.
• This is a very flexible plan, but they plan to put retirement into it for 24 years, then start taking money from it when they’re 65.
• It will become like their own self-funded, self-controlling, tax-free hybrid pension, but it will be better for them.
• Over the total of 24 years, he would have put in $480,000.
• In year 25, he would start getting tax-free income. A tax-free income of $162,399 is shown in the illustration.
• At their tax rate of 30%, that would be equivalent to $211,118 in income per year.
• Assuming that another investment, like stocks or bonds, made an average of 8% a year, how much would Jim have to invest each month in order to get 5% for the rest of his life?
• When you start with the tax equivalent income of $221,118 per year, divide that by the 5% recommended income withdrawal rate from stocks and bonds, and the total comes to $4,222,374.
• Over the next 24 years, we’d have to save the value of his monthly investment plus an average of 8% every year, in the future stock market.
• Now let’s use the financial calculator to find the monthly payment in today’s dollars, making 8 percent (assuming you could make 8 percent in the market) over the 24-year period before you would begin taking income. This $4,222,374 is much more money than the $480,000 that he put away in principal for the IUL. You’d have to invest $58,465 every month, or $1,403,161 in principal alone, and earn 8% for 24 years to get it.
• This is just an example, but it shows that from age 65 to 85, an IUL would have provided $3,247,980 in total tax-free income, then a tax-free death benefit of $922,638.
• This would have given the family a total tax-free benefit of $4,170,618, which is a lot of money. This could be a big part of their income needs.
• While previous performance is never any assurance of the future, we truly cannot exhibit these products historically at less than 7-9 percent interest rate returns, either you get a gain or you get a zero.
• On top of that, you didn’t have to do anything to get these returns. As a side note, many parents use IUL cash values to pay for their kids’ college as well, since there is no age 59.5 limit on cash values.

There are good chances that Indexed Universal Life could give you two to three times as much money back as traditional investments, depending on how well the indexes do and how much tax you pay. This is because the principal is protected from market losses, the indexing, and the taxman is legally cut out of the picture. You have harnessed what Einstein called one of the most powerful forces in the universe: compounding interest.