Why Use IUL in Retirement Planning
IUL2021IULandRet [email protected] • indexeduniversal.life • 800-743-9221 2 TABLE OF CONTENTS Why Use IUL in Retirement Planning? Choosing the Right Financial Tools for Your Needs Understanding Life Insurance and Its Many Uses in Retirement Planning Term Life Insurance vs. Permanent Life Insurance Understanding How Indexed Universal Life (IUL) Insurance Works Crediting Methods on Indexed Universal Life Insurance How to Further "Customize" Your Indexed Universal Life Insurance Policy to Match Your Objectives How IUL Could Enhance Assets and Income — Before and After Retirement How You Could Access Tax-Free Cash from Your Indexed Universal Life Policy Indexed Universal Life (IUL) vs. Whole Life Insurance Indexed Universal Life (IUL) vs. Variable Life Insurance Indexed Universal Life (IUL) vs. Universal Life Insurance Indexed Universal Life (IUL) vs. Term Life Insurance Indexed Universal Life (IUL) vs. 401(k) Plans Indexed Universal Life (IUL) vs. Roth IRAs Does Indexed Universal Life Insurance Belong in Your Retirement Plan? 03 03 10 04 12 06 13 07 16 08 18 21 23 26 28 34
IUL2021IULandRet [email protected] • indexeduniversal.life • 800-743-9221 3 With so many unknowns, short and long-term financial planning can be challenging. Life expectancy, stock market performance, future interest rates, taxes, and retirement income needs are just a few. One way to better ensure that you're ready is to anticipate various scenarios and then plan for them. In other words, hope for the best, but prepare for the unexpected, just in case. This requires having a good, solid strategy and the right financial tools in place. Because everyone's goals, risk tolerances, and time frames are different, there isn't just one plan or financial product that's right for all investors and retirees across the board. Yet, given today's volatile stock market and historically low-interest rates, many people are turning to more "non-traditional" financial vehicles for accumulation, tax reduction, and retirement income needs. One such tool is indexed universal life (IUL) insurance. Life insurance can be a key component in most well-constructed financial and retirement plans. The income-tax-free death benefit received by the beneficiary(ies) may be used for a long list of financial needs, such as income replacement or debt payoff. But many people are unaware that this flexible financial vehicle can provide a wide variety of benefits, both after death and while the insured is alive. Why Use IUL in Retirement Planning? Choosing the Right Financial Tools for Your Needs
IUL2021IULandRet [email protected] • indexeduniversal.life • 800-743-9221 4 While there are several different life insurance policy variations, there are just two primary categories of coverage. These are: • Term life insurance • Permanent life insurance Term life insurance is the most "basic" of these coverage types, offering pure death benefit protection only, without any type of cash value or investment build-up. As the name suggests, term life insurance remains in force for a certain time, or "term," such as 1 year, 10 years, 20 years, or 30 years (or longer). Due to its basic structure and simplicity, the premiums charged on term life are typically less than those required for a permanent life insurance policy with the same amount of death benefit protection. Term life insurance is often used to cover debts or needs that are considered "temporary," such as paying off a 30-year mortgage balance or the funding of a child or grandchild's future college education costs. If a term life insurance policy "expires" after the preset time (or term) has elapsed, it may be necessary for the insured to reapply for or renew the coverage (if they still want or need the protection). Suppose the insured can renew the coverage. In that case, the policy's premium will typically be higher than the initial policy, mainly based on their older age (and possibly any adverse health condition they have contracted). In some instances, if the insured has been diagnosed with more severe health issues, they may be uninsurable and thus unable to renew their term life insurance coverage. As an alternative to term life, permanent life insurance offers both death benefit protection and either a cash value or investment component, based on the type of coverage. As long as the premium is paid, permanent life insurance will usually stay in force for the remainder of the insured's lifetime. Understanding Life Insurance and Its Many Uses in Retirement Planning
IUL2021IULandRet [email protected] • indexeduniversal.life • 800-743-9221 5 There are several types of permanent life insurance coverage: • Whole life insurance • Universal life insurance • Variable life insurance • Variable universal life insurance • Indexed universal life (IUL) insurance The funds in the cash value component of a permanent life insurance policy grow tax-deferred. This means no tax is due on the gain until these funds are withdrawn. The return on the cash value will be based largely on the type of policy chosen. For example, whole life insurance cash values are usually conservative, and they typically offer a low fixed rate of return. At the same time, they keep the principal safe in any type of market or economic environment. On the other hand, the return with a variable life insurance policy is based on the performance of underlying investments like mutual funds. So, while there could be a substantial return generated in the account, there is also the risk of loss.
IUL2021IULandRet [email protected] • indexeduniversal.life • 800-743-9221 6 Term Life Insurance vs. Permanent Life Insurance Term Life Insurance Permanent Life Insurance For more temporary needs For more permanent needs Lower premium (at least initially) Higher initial premium Fixed "expiration" date (and the insured may or may not be eligible to renew the coverage) Premium usually a fixed amount No cash value Coverage for life Benefit paid at the insured's death Cash or investment value (which grows tax-deferred) "Rent" vs. "Buy" the coverage Can receive benefits during the insured's life and at death A relatively new form of life insurance coverage, indexed universal life (IUL), offers what many consider to be the "best of all worlds," because it provides the opportunity for a marketlinked return on the cash value. Still, it keeps the principal (and the previous gains) safe if the underlying investment index(es) performs poorly. There is a long list of other benefits that can come with owning an IUL policy, too, which could make these policies very enticing for life insurance needs, retirement planning, and income strategies.
IUL2021IULandRet [email protected] • indexeduniversal.life • 800-743-9221 7 Indexed universal life (IUL) is a form of permanent life insurance that includes death benefit protection and a cash value component. Unlike whole life or regular universal life insurance policies, which typically generate a low return in their cash value, IUL insurance generates its cash value return based on the performance of one or more underlying market indexes. Some of the more common indexes used for tracking are the S&P 500 and the Dow Jones Industrial Average (DJIA). As a result, IUL policyholders have the opportunity to increase the returns in the policy's cash component. They may even double or triple them compared to other types of permanent life insurance or other "safe" money investments like certificates of deposits and bonds, which also typically have taxable annual gains. Indexed universal life and regular universal life insurance policies are structured similarly. However, there is a big difference in how the return is calculated with IUL. Because various market indexes are tracked, the account's value may grow exponentially, particularly if the policy is held over a long period. Furthermore, there are no losses in the cash value of the indexed universal life insurance policy, even if the underlying index(es) performs poorly in a given period. Therefore there is no loss, and depending on the policy, there may even be a guaranteed "floor" rate that is still credited. This protection of principal provision means that there are no losses to make up for when (or if) the tracked index(es) turns positive again. So, the amount of the policy's cash value can continue to build up. With that in mind, even though an IUL policy's cash value may not generate significantly high returns because there are no losses, the account value could still surpass that of an account that invests in equities with unlimited gains and the risk of losses. Understanding How Indexed Universal Life (IUL) Insurance Works
IUL2021IULandRet [email protected] • indexeduniversal.life • 800-743-9221 8 While they offer many of the same features and benefits, not all indexed universal life insurance policies are exactly the same. For example, several "crediting methods" may be used to determine the IUL's cash value return. These methods can include the use of "caps," participation rates, and spreads, which can limit the potential upside growth of the account. However, the "tradeoff" of no losses in the account, even during a significant stock market correction, can be well worth it. Understanding how caps, participation rates, and spreads work and which (if any) of these are used to calculate the policy's cash value return can help you know what to anticipate in terms of performance. A "cap” represents the highest rate of growth that is credited to the indexed universal life insurance policy's cash value. This is true, even if the underlying index (or indexes) has a substantially high return performance during a given contract year. As an example: if the policy has a cap of 7%, and the underlying index that it tracks generates a 10% return for a given contract year, then 7% will be credited as the return on the cash value for that period. Alternatively, if the cap stated on the IUL policy is 7%, and the underlying index (or indexes) returns 3% for a particular policy contract year, then the 3% will be credited to the cash value component for that period. The offering insurance company also sets the participation rate that is used on an indexed universal life insurance policy. These rates refer to the percentage of the tracked index's gain credited to an IUL's cash value. For instance, if the participation rate on a policy is 80%, and the underlying index(es) generates 10% in a given time frame, the cash value would receive an 8% positive return. A spread may also be used, either alone or in conjunction with a cap and/or a participation rate, as part of the formula for determining an IUL policy's cash value return in a given period. Spreads are also expressed as a percentage. In this particular case, a certain amount will be subtracted from the generated return from the underlying index(es). For example, if there is a spread of 4% used on the policy, and the tracked index(es) returns 10% in a given contract year, then 6% will be credited as the return on the cash value. 80% participation rate X 10% return on the underlying index = 8% return credited to IUL cash value Crediting Methods on Indexed Universal Life Insurance
IUL2021IULandRet [email protected] • indexeduniversal.life • 800-743-9221 9 As a "tradeoff" of sorts for the potential limits on the upside of an IUL policy's cash value, if the underlying index performs poorly in a given contract year, there are no losses incurred. In fact, with many indexed universal life insurance policies, the cash value is still credited with a guaranteed minimum rate such as 1% or 2%. So, even if an index loses value, the cash in the IUL policy can still keep growing. Therefore, because there are no losses incurred, there are no negative returns that the policy's cash value account has to "earn back" before it gets back to "even." Consequently, the value can continue to build up over time. Like other types of permanent life insurance, the funds inside the IUL cash value account are allowed to grow on a tax-deferred basis. This means there is no tax due each year on the growth, but rather it is taxed in the future if withdrawn. Strategies for accessing these funds tax-free will be discussed further in this guide. This is yet another feature that can help the funds inside of an IUL policy's cash value grow and compound over time and often to even outpace a fully taxable investment, with all other factors being equal. That is because the funds are generating a return on the principal, the previous gains, and the amount of money that would have been paid out in taxes. 10% return on the underlying index – 4% spread = 6% return credited to the IUL cash value
IUL2021IULandRet [email protected] • indexeduniversal.life • 800-743-9221 10 Because everyone's needs are different, there isn't just one IUL policy that is right for everyone. Plus, based on age and health conditions, not everybody will be able to qualify for an indexed universal life insurance policy. Given the variety of crediting methods and the available riders offered, one IUL policy could differ significantly from another. The premium charged for these policies can vary based on where they are purchased from, even if they offer the same benefits and coverage amount. Many indexed universal life insurance policies provide additional features and benefits that can help you "design" the plan to fit your specific needs more closely. As an example, depending on the particular IUL policy, some of the most common riders offered include the following: Waiver of Premium Rider: The waiver of premium rider allows the policyholder to stop paying premium payments if they become critically ill, seriously injured, or disabled and unable to work and earn an income. Note that based on the actual policy and the rider, other criteria may also need to be met to trigger the waiver of premium. Accidental Death and Dismemberment (AD&D) Rider: With the accidental death and dismemberment, or AD&D rider, a benefit is paid either to the insured or to the policy beneficiary(ies) if the insured dies or loses a limb or digit (which may include the loss of eyesight, hearing, or speech) in an accident. In the event of death, the accident must ultimately be the cause. How to Further "Customize" Your Indexed Universal Life Insurance Policy to Match Your Objectives
IUL2021IULandRet [email protected] • indexeduniversal.life • 800-743-9221 11 Disability Income Rider: The disability income rider provides a supplemental income benefit if the insured becomes totally disabled, as defined in the policy. The income payment or benefit is usually stated as a percentage of the policy's death benefit. So, for instance, if the face amount of the policy is $100,000, and the benefit paid is 1% of the death benefit proceeds, then the monthly income paid out would be $1,000. Guaranteed Insurability Rider: The guaranteed insurability rider allows the insured to purchase additional life insurance in the future without proving insurability. Generally, the guaranteed insurability rider will only allow the purchase option(s) at pre-specified times and for various life events, such as the insured getting married or having a child. This rider may be a viable option if you cannot afford a large amount of life insurance at this time but will need to increase your coverage later on. It can also be highly beneficial if the insured contracts an illness or is involved in a debilitating accident and could otherwise be deemed uninsurable. Terminal / Chronic Illness Waiver: With many permanent life insurance policies, including indexed universal life, the policyholder can access a portion of the funds penalty-free if diagnosed with a terminal or chronic illness. Long-Term Care Waiver: Many indexed universal life insurance policies also allow for accessing funds if the insured requires care in a nursing home for at least a certain amount of time (such as 90 days). In turn, this can help to keep other assets intact and, as such, used for their originally intended purposes.
IUL2021IULandRet [email protected] • indexeduniversal.life • 800-743-9221 12 While many people purchase life insurance for the death benefit protection, numerous benefits can also be attained while the insured is alive. Due to this flexibility, policies like indexed universal life are being purchased for various other needs. These include supplementing retirement income, paying off high-interest debt, putting a down payment on a new home, or even taking a long-awaited vacation. Different options are available for accessing money from the cash value component of an indexed universal life insurance policy. These include making direct withdrawals and taking policy loans. Many IUL policies will also often offer penalty-free withdrawal waivers under certain circumstances, such as a terminal illness diagnosis or the need to reside in a nursing home for a minimum amount of time (such as 90 days). It is important to note, though, that if funds are withdrawn from the policy, it could "cost" you in terms of taxes, the payment of surrender charges, and/or an additional 10% IRS "early withdrawal" penalty. With that in mind, you may only net out about 50% of the total amount of your withdrawal. The good news is that there are some solutions available for you. For example, because it can be "expensive" to withdraw funds from an IUL policy (in turn, reducing the amount of money you have to use from the withdrawal), many policyholders take an alternate route for accessing money from the cash value. This is done by way of a tax-free loan. How IUL Could Enhance Assets and Income — Before and After Retirement
IUL2021IULandRet [email protected] • indexeduniversal.life • 800-743-9221 13 The word "loan" might not be very enticing to most people. However, in the case of indexed universal life insurance, taking a policy loan to pay off debt, make purchases, or supplement retirement income could be highly beneficial. One reason is that you will have use of 100% of the money you access, as unlike taking a policy withdrawal, there is no tax due on the borrowed funds. In addition, you are technically borrowing these funds from the insurance company and not directly from your IUL policy's cash value. Therefore, interest will continue to be generated on the total amount of the cash in your plan. In a hypothetical example, if your IUL policy has a cash value of $80,000 and you borrow $40,000, the return on your cash component is still determined based on the total of $80,000. As an additional bonus, even though interest will accrue on the loan’s outstanding balance if the loan has not been paid back in full by the time the insured passes away, the balance will simply be paid off using the proceeds from the death benefit. Afterward, the remaining death benefit funds will be paid to the beneficiary(ies) named in the policy. You might even have the opportunity to receive the funds that you borrow from the policy cost-free and tax-free. Even though the insurance company will charge you an interest rate on the borrowed funds, this interest could essentially be offset by the interest that your money is continuing to earn in the cash account. As an example, if the insurance company charges you 2% interest (which is quite possible, as life insurance policy loans will often have a lower interest rate than traditional loans from banks and other lenders), and the money that is sitting in your policy's cash value is also earning a 2% rate of interest, then you have just secured a no-cost distribution. Before you take any type of cash from an IUL policy, it is highly recommended that you consult with a life insurance specialist to structure the loan provision to fit all of the required parameters and obtain the best possible rates. How You Could Access Tax-Free Cash from Your Indexed Universal Life Policy
IUL2021IULandRet [email protected] • indexeduniversal.life • 800-743-9221 14 Pros and Cons of Indexed Universal Life Insurance Advantages of Indexed Universal Life Insurance Disadvantages of Indexed Universal Life Insurance Death benefit coverage (paid income-tax-free to the beneficiary) Limitations on the growth of the cash value (caps, spreads, and/or participation rates) Low premiums Surrender charge(s) on withdrawals from the cash value Flexibility Surrender charge if the policy is canceled during a preset period Tax-deferred gains in the cash value Premium for the death benefit could go up Opportunity for higher growth than whole life and regular universal life insurance Principal protection in any type of market environment No limit on annual contribution to the policy Some liquidity Ability to access cash via withdrawal or taxfree loan May "customize" policy via riders No required minimum distribution (RMD) rules
IUL2021IULandRet [email protected] • indexeduniversal.life • 800-743-9221 15 Even with all the benefits attained through indexed universal life insurance, it is essential to compare this vehicle with other retirement savings income products and strategic alternatives to determine if IUL is truly right for you. These comparisons with other products and account types should include the following: • Whole life insurance • Variable life insurance • Universal life insurance • Term life insurance • 401(k) • IRA
IUL2021IULandRet [email protected] • indexeduniversal.life • 800-743-9221 16 Whole life insurance is a type of life insurance coverage that offers death benefit protection, a cash value, or a savings component. Once an insured has been approved for whole life insurance, the policy will remain in force as long as the premium is paid. If the insured passes away while a whole life policy is in force, the death benefit proceeds will be paid out to one or more named beneficiaries. These death benefit proceeds are usually free of income taxation to the recipient(s). However, they could still be included in the overall value of the insured's estate for estate tax purposes. The funds in the cash value of a whole life insurance policy grow tax-deferred, so there is no tax due on the gain until these funds are withdrawn. Like with an IUL policy, whole life insurance policyholders may withdraw or borrow cash from the policy. Indexed Universal Life (IUL) vs. Whole Life Insurance Pros and Cons of Whole Life Insurance Whole Life Insurance Advantages Whole Life Insurance Drawbacks Permanent death benefit protection (as long as the premium is paid) Premium is typically higher compared to a term policy with the same amount of death benefit Death benefit is income tax-free to the beneficiary(ies) Cash value withdrawals may be taxable (and may also incur an additional IRS 10% early withdrawal penalty if under age 59 ½) Cash value grows tax-deferred Surrender charges in early years of the policy Protection of principal in any type of market or economic environment Low return on cash value May take tax-free policy loans May be charged interest on the borrowed funds Premium amount usually does not increase Not as flexible as some other types of permanent life insurance
IUL2021IULandRet [email protected] • indexeduniversal.life • 800-743-9221 17 Indexed Universal Life (IUL) vs. Whole Life Insurance Although there are several similarities between whole life and indexed universal life (IUL) insurance, there are also some distinct differences. For instance, the cash value of an indexed universal life insurance policy offers the opportunity for significantly more growth, especially if it is held over a long period. On the other hand, the low return offered in a whole life policy is not likely to meet, much less beat inflation. So, if a permanent life insurance policy is being used to supplement retirement savings, whole life may not necessarily be the best route. So, the focus of a whole life policy is generally on death benefit protection. In contrast, indexed universal life may be more appealing for retirement savings or income, along with its death benefit protection - just in case the insured dies unexpectedly. In addition, while there is usually a fixed premium throughout the lifetime of a whole life insurance policy, the premiums with IUL are generally much more flexible in terms of timing, amount, and the allocation between the cash value and the insurance portion of the policy. Indexed Universal Life Insurance Whole Life Insurance Type of Life Insurance Permanent Permanent Cash Value Return Opportunity for index-linked growth Typically, a low, fixed return Tax-Deferred Growth Yes Yes Principal Protection Yes Yes Surrender Charges Yes Yes Withdrawals Gains are taxable Gains are taxable Tax-Free Loans Yes Yes Premiums Flexible (on timing, placement, and amount, within certain guidelines) Fixed amount (and due date) for the life of the policy
IUL2021IULandRet [email protected] • indexeduniversal.life • 800-743-9221 18 Variable life insurance is another type of permanent life policy. As with other forms of cash value life insurance coverage, variable life provides both a death benefit and a cash value component that grows on a tax-deferred basis. That being said, variable life insurance differs from other types of permanent life insurance, such as whole life, when it comes to the investment options for the cash value portion. For instance, rather than the insurance company choosing the investment type, the fund allocations, or the rate of return for the cash, the policyholder can typically choose from a wide array of investments such as stocks, mutual funds, and other types of equities. Because of the tax-deferred growth in a variable life insurance policy, there is potential for the policyholder's funds to compound and increase exponentially, as no tax will be due on the gain until the time of withdrawal. Unlike a whole life policy, variable life insurance policies do not guarantee a minimum cash value, as poor investment performance could potentially diminish the entire amount, including the principal and the previous gains in the cash/investment component. Variable life insurance is considered to be a security, so you must be offered an insurance prospectus before purchasing this type of coverage. There also tend to be high fees associated with variable life insurance, which can negatively impact the overall return generated in the cash value. Indexed Universal Life (IUL) vs. Variable Life Insurance Pros and Cons of Variable Life Insurance Variable Life Insurance Advantages Variable Life Insurance Drawbacks Death benefit protection Risk of loss (to both principal and previous gains) Potential for high return on the cash/ investment value component Withdrawals may be taxable (and an additional 10% IRS "early withdrawal" penalty may also be incurred) Policyholder can typically choose from a variety of investments to track Surrender charges in early years of the policy Cash/investment value grows tax-deferred Premium payments may vary Death benefit proceeds can be income taxfree to the beneficiary(ies) High fees (due to investment management, administrative costs, mortality and expense risk charge, etc.)
IUL2021IULandRet [email protected] • indexeduniversal.life • 800-743-9221 19 While both indexed universal and variable life insurance can offer some nice benefits, there are several distinct differences between the two types of policies. As a result, it is essential to know what these are before purchasing one or the other. For instance, even though variable life insurance can provide unlimited upside returns (depending on the particular policy), there is also the chance of loss. This means that both principal and prior gains in the account could disappear. If that is the case, it can take a much higher future return just to get the account value back to its breakeven point. Furthermore, in the case of negative returns, the larger the loss, the more future return is necessary just to get the account's value back to square one (where it was before the loss occurred). Moreover, the death benefit on a variable life insurance policy could also fluctuate based on market performance. Therefore, if your survivors must have a particular amount of death benefit proceeds for paying off debt or replacing the insured's lost income, there is no guarantee that they will receive it with variable life insurance. On the other hand, indexed universal life insurance also offers the opportunity to generate an optimum return in the cash value based on the performance of one or more underlying market indexes. While the upside potential of indexed universal life may be limited by caps, participation rates, or spreads, the "tradeoff" here is that there are no losses incurred, no matter how poorly the index(es) perform in any given period. Indexed universal life insurance also offers a set amount of death benefit. Suppose loved ones, business partners, or other survivors count on that for future funding, income, or debt payoff needs. In that case, there is a lot more certainty with IUL than there is with a variable life insurance policy.
IUL2021IULandRet [email protected] • indexeduniversal.life • 800-743-9221 20 IUL vs. Variable Life Insurance Indexed Universal Life Insurance Variable Life Insurance Type of Life Insurance Permanent Permanent Death Benefit Fixed amount Could fluctuate up or down Cash Value Return Opportunity for index-linked growth Opportunity to generate large returns, but also the risk of loss (of principal and previous gains) Tax-Deferred Growth Yes Yes Principal Protection Yes No Surrender Charges Yes Yes Withdrawals Gains are taxable Gains are taxable Tax-Free Loans Yes Possibly Premiums Flexible (on timing, placement, and amount, within certain guidelines) Single or multiple premiums allowed
IUL2021IULandRet [email protected] • indexeduniversal.life • 800-743-9221 21 The Pros and Cons of Universal Life Insurance Universal Life Insurance Advantages Universal Life Insurance Drawbacks Permanent death benefit protection Cost of insurance/premium could go up over time Death benefit is received income tax-free by the beneficiary(ies) Cash value withdrawals may be taxable (and may also incur an additional IRS 10% early withdrawal penalty if the policyholder is under age 59 ½) Tax-deferred cash value build-up Return on the funds in the cash value is typically low Flexibility (regarding premium and timing of the premium payments) Surrender charges in the early years of the policy Universal life, or UL, is yet another form of permanent coverage. There are different forms of universal life insurance available in the marketplace today, including regular UL, variable universal life, and indexed universal life insurance. As with many other forms of life insurance policies, this particular type of protection can be purchased with one single lump sum or with multiple premiums paid over some time. Likewise, the funds in the cash value component of the universal life insurance policy are allowed to grow on a tax-deferred basis. Overall, universal life is deemed more flexible than the more "basic" whole life insurance policies. One reason for this is that the owner of a universal life insurance policy may be able to alter (within specific guidelines) the timing and the amount of the premium. They may also be allowed to allocate a desired portion of the premium towards the death benefit and the cash component. If this is the case, the coverage and cash value could be affected. Therefore, it is essential to be mindful of this fact. It is also important to note that the premium cost of universal life insurance may increase as the insured gets older (and, in turn, as their life expectancy gets shorter). Typically, though, as long as there is enough money in the policy to keep the coverage in force, an income-tax-free death benefit will be paid out to the named beneficiary (or beneficiaries) if the insured dies. Indexed Universal Life (IUL) vs. Universal Life Insurance
IUL2021IULandRet [email protected] • indexeduniversal.life • 800-743-9221 22 Although many enticing features can come with owning a regular universal life insurance policy, the "newer" form of coverage, indexed universal life insurance, could provide you with all of the same benefits, along with a way to further increase the return on the cash value, given the performance of the underlying index(es). For instance, with the crediting of interest on an indexed universal life insurance policy, the movement of the underlying index (or indexes) is usually measured over a specific period, such as a contract year or anniversary. Suppose the IUL policy is being positioned to help enhance retirement cash flow in the future. In that case, an income rider may also be added that allows the policy to keep the death benefit protection for the beneficiary(ies) while simultaneously providing the potential for guaranteed lifetime income for the policyholder. So, for some investors and retirees, indexed universal life insurance could offer the best of both worlds in terms of solutions for their objectives. Indexed Universal Life vs. Universal Life Insurance Indexed Universal Life Insurance Universal Life Insurance Type of Life Insurance Permanent Permanent Cash Value Return Opportunity for index-linked growth Lower return; not tied to specific market index(es) Tax-Deferred Growth Yes Yes Principal Protection Yes Yes Surrender Charges Yes Yes Withdrawals Gains are taxable Gains are taxable Tax-Free Loans Yes Yes Premiums Flexible (on timing, placement, and amount, within certain guidelines) Flexible (on timing, placement, and amount, within certain guidelines)
IUL2021IULandRet [email protected] • indexeduniversal.life • 800-743-9221 23 Term is considered to be the most basic, plain, "vanilla" type of life insurance protection that is available in the market. The premium for term life insurance is often relatively low, especially if the insured is young and in good health when the policy is purchased. However, if the insured wants to continue having life insurance coverage after the initial time frame, or term, has elapsed, the premium will likely rise if they opt to renew the policy. This is particularly so if they are in poor health or due to their then-current older age and subsequent shorter life expectancy, which equates to more risk to the insurance company. Term life insurance is often used to cover debts or financial obligations considered "temporary" or short-term, such as the payoff of a 30-year mortgage balance or the funding of a child or grandchild's future college education expenses. Some term life insurance policies are "convertible" or contain a conversion feature. This means that the term policy can be converted over from term or “temporary" into a permanent form of coverage, usually whole life or universal life insurance coverage. That way, the insured can essentially lock in life insurance coverage for the remainder of their lifetime. Indexed Universal Life (IUL) vs. Term Life Insurance
IUL2021IULandRet [email protected] • indexeduniversal.life • 800-743-9221 24 Pros and Cons of Term Life Insurance Term Life Insurance Advantages Term Life Insurance Drawbacks Lower premium compared to permanent life insurance with the same amount of death benefit (especially if the insured is younger and in good health) Policy expires after a preset period of time May be converted to permanent life insurance coverage Can be expensive if it is renewed Death benefit is income tax-free to the beneficiary(ies) Could leave the insured without future coverage if they become uninsurable and are unable to renew While term life insurance can often be very affordable, these plans typically have just one single purpose: providing death benefit protection. On the other hand, an indexed universal life insurance policy provides coverage, along with a whole host of other benefits, such as tax-deferred growth on the cash value, and a way to access funds penalty-free (via a policy loan) for paying off higherinterest debt or supplementing retirement income. Indexed universal life insurance could also provide you with other benefits. For instance, while all IUL policies are not identical in terms of their features, many will allow you to take advantage of one or more of the following benefits: Terminal / Chronic Illness Waiver With many IUL policies, you are allowed to access a portion of the funds penalty-free if you have been diagnosed with a terminal or chronic illness. Long-Term Care Waiver Many indexed universal life insurance policies will also allow accessing funds if you require care in a nursing home for at least a certain amount of time (such as 90 days). In turn, this can help you to keep other assets intact and, as such, used for their originally intended purposes.
IUL2021IULandRet [email protected] • indexeduniversal.life • 800-743-9221 25 Term Life Insurance vs. Indexed Universal Life Term Life Insurance Indexed Universal Life (IUL) Insurance Death Benefit Duration Pre-set period Lifetime (as long as the premium is paid) Cash Value Return None Opportunity to generate an index-linked return, with principal protected in downward moving market environments Tax-Deferred Growth N/A Yes Principal Protection N/A Yes Surrender Charges No Yes Withdrawals N/A Gain is taxable Living Benefits Offered Possibly Yes Tax-Free Loans N/A Yes Premiums Remains set with level term May vary with other types of term insurance policies Flexible (single lump sum or multiple premium payments); however, the premium may increase if the cost of insurance goes up
IUL2021IULandRet [email protected] • indexeduniversal.life • 800-743-9221 26 A 401(k) plan is a tax-advantaged, "defined contribution" account that is offered by many employers to help their workers save and invest for retirement. As its name implies, there is a set amount of contribution that a participant may add to a 401(k) account. Each year, the IRS dictates the maximum amount of money that employees may contribute to employer-sponsored retirement savings plans like the 401(k). For 2021, the maximum 401(k) contribution is $19,500 for those aged 49 and younger. Employee participants aged 50 and older may contribute an additional $6,500 in "catch up" contribution, for a total of $26,000. Additional funds may also be contributed to an employee's 401(k) plan, such as funds through an employer's "match." This is typically based on a certain percentage of the employee/participant's contribution amount. When the time comes to retire, many 401(k) plan participants will often "roll" some or all of the funds from their account over to an income-generating vehicle, such as an annuity. Provided that the money goes directly into the new account, the transaction will not be considered a taxable event. The funds generated from a traditional 401(k) plan, versus a Roth 401(k) plan, will be fully taxable when withdrawn. None of the money, neither principal nor gains, has yet been taxed. So, a portion of each withdrawal or income payment could go to Uncle Sam, not towards purchasing the items and services needed in retirement. In addition, with anticipation that tax rates will go up in the future, there can be an even more negative effect on spendable cash flow in retirement. One of the many positive features of indexed universal life insurance is the ability to access funds through a tax-free loan. The policyholder can use this money, and technically, the funds do not have to be repaid while the insured is still living. Rather, if there is still a remaining loan balance at the time of the insured's death, the loan can be paid off using the policy's proceeds, with the rest of the death benefit then being paid out to the named beneficiary(ies). In addition, with an IUL policy loan, you are technically borrowing from the insurance company and not directly from your policy's cash value. Therefore, interest will continue to be generated on the total amount of the cash in your policy's cash account. Indexed Universal Life (IUL) vs. 401(k) Plans
IUL2021IULandRet [email protected] • indexeduniversal.life • 800-743-9221 27 Comparison of 401(k) vs. IUL 401(k) IUL Plan Funding Pre-tax dollars (usually) After-tax dollars Contribution Limit Annual maximum contribution No annual maximum contribution Growth in the Account Tax-deferred growth Tax-deferred growth Risk Subject to market risk Offers a "floor" in times of poor market/index performance, as well as the opportunity to generate higher returns when the tracked index(es) performs well Distribution Requirements Required Minimum Distribution (RMD) at age 72 No required distributions at any age Taxability of Withdrawals 100% taxable (with the traditional plan) Tax-free loan (which may not have to be repaid during the insured's lifetime)
IUL2021IULandRet [email protected] • indexeduniversal.life • 800-743-9221 28 Another savings vehicle used by many investors and retirees today is the Roth IRA (Individual Retirement Account). Unlike traditional IRAs, Roth IRAs are funded with after-tax dollars. So, there is no income tax deduction for these contributions in the year(s) that they are made. However, the tradeoff here is that the earnings in a Roth IRA accumulate tax-free. Moreover, the withdrawals from a Roth IRA also come out tax-free, regardless of the then-current income tax rates. This tax-advantaged feature of the Roth IRA can be extremely beneficial, as the United States has been in a historically low-income tax rate environment for many years, and taxes are likely to go up in the future. Source: Inside Gov (http://federal-tax-rates.insidegov.com/) Indexed Universal Life (IUL) vs. Roth IRAs Top Federal Income Tax Rates 1913 – 2021 Year Rate (%) Year Rate (%) 2018-2021 37 1950 84.36 2013-2017 39.6 1948-1949 82.13 2003-2012 35 1946-1947 86.45 2002 38.6 1944-1945 94 2001 39.1 1942-1943 88 1993-2000 39.6 1941 81 1991-1992 31 1940 81.1 1988-1990 28 1936-1939 79 1987 38.5 1932-1935 63 1982-1986 50 1930-1931 25 1981 69.125 1929 24 1971-1980 70 1925-1928 25 1970 71.75 1924 46 1969 77 1923 43.5 1968 75.25 1922 58 1965-1967 70 1919-1921 73 1964 77 1918 77 1954-1963 91 1917 67 1952-1953 92 1916 15 1951 91 1913-1915 7
IUL2021IULandRet [email protected] • indexeduniversal.life • 800-743-9221 29 There are some items to consider before opening a Roth IRA, though. For instance, if you earn "too much" money, you may not be eligible to open this type of account. There are also maximum annual contribution limits concerning Roth IRAs, as well as traditional IRAs and 401(k) plans. For 2021, investors who are age 49 or younger may contribute up to $6,000 to a Roth IRA, and those who are age 50 or older are allowed to make an additional $1,000 "catch up" contribution for a total of $7,000. Source: irs.gov Roth IRA Income and Contribution Limits (for 2021) Tax Filing Status Modified Adjusted Gross Income (MAGI) in 2021 Roth IRA Contribution Limit Married filing jointly (or qualifying widow or widower) • Less than $198,000 • $198,000 to $207,999 • $208,000 or more • $6,000 (or $7,000 if age 50 or older) • Begin to phase out • Ineligible for making direct Roth IRA contributions Married filing separately (and you lived with your spouse at any time during the year) • Less than $10,000 • $10,000 or more • Begin to phase out • Ineligible for direct Roth IRA contributions Single, head of household, or married filing separately (and you didn't live with your spouse at any time during the last year) • Less than $125,000 • $125,000 to $139,999 • $140,000 or more • $6,000 (or $7,000 if age 50 or older) • Begin to phase out • Ineligible for making a direct Roth IRA contribution
IUL2021IULandRet [email protected] • indexeduniversal.life • 800-743-9221 30 Because there are so many rules for participating in Roth IRAs, it could make sense to consider adding an indexed universal life insurance policy in conjunction with this type of retirement savings vehicle. As an example, in addition to the opportunity for higher cash value growth with IUL (versus with whole life or regular universal life insurance), there are other benefits that you may also be able to attain through an indexed universal life insurance policy, too. So, when comparing the benefits of an IUL policy to those of a Roth IRA, the following should be kept in mind: Tax-Deferred Growth: Indexed universal life insurance allows the cash account to grow on a tax-deferred basis. Therefore, there will be no tax due on the gains in the account until the time of withdrawal, in turn, providing the ability to compound exponentially over time – especially compared to a taxable account, with all other factors being equal. Suppose other tax-deferred accounts, such as traditional IRAs and 401(k) plans, have reached their annual maximum contribution limits. In that case, an IUL policy can allow you to continue expanding your tax-advantaged retirement savings. Principal Guarantees: Permanent life insurance policies like indexed universal life provide several types of guarantees. In this case, the cash value will be credited with a guaranteed minimum floor amount, even if the index(es) being tracked incurs a loss in a given contract period. These types of policies also guarantee that a death benefit will be paid to one or more named beneficiaries if the insured dies while the policy is in force. This is not the case with a Roth IRA. For instance, if the Roth account is invested in equities like stocks or mutual funds, and these financial vehicles incur a loss, then both principal and previous gains could be lost. Therefore, with a Roth IRA account, there is no minimum return guarantee or guaranteed downside protection like with indexed universal life insurance.
IUL2021IULandRet [email protected] • indexeduniversal.life • 800-743-9221 31 Unlimited Contributions: Employer-sponsored plans and individual retirement accounts (IRAs) generally mandate a maximum annual contribution limit. This, in turn, can reduce the total amount of tax-advantaged savings that you have. But permanent life insurance like IUL can allow you to make unlimited contributions into an account that grows on a tax-deferred basis. You could also access this tax-free in the future, even if you have already "maxed out" the contribution limit on these other types of plans. Flexibility: Indexed universal life insurance policies can also provide you with flexibility regarding how the cash value return is credited. In addition, as with regular universal life (UL) insurance, IUL policyholders may decide (within specific guidelines) how much of the premium will go towards the death benefit and how much of it will go towards the cash value component. No Impact on Social Security Retirement Income Benefits: Social Security retirement benefits may be taxable in some cases, such as when generating "too much" income from other sources. But, neither the growth on an IUL policy nor the funds accessed via a tax-free loan count against these income thresholds. As such, they will not impact the potential taxation of your Social Security benefits.
IUL2021IULandRet [email protected] • indexeduniversal.life • 800-743-9221 32 Tax-Free Access to the Cash Value: Many of today's "traditional" retirement savings plans allow for pre-tax contributions and taxdeferred growth. So, upon withdrawal from these types of accounts, 100% of the funds you access in retirement may be fully taxable, and these taxes will be charged at a future rate that is currently unknown to you. The good news is that tax-free withdrawals are allowed from certain types of accounts, such as Roth IRAs and 401(k)s, and via some types of life insurance policy loans—IUL policies fall into this category. These tax-free policy loans can provide you with more net spendable income in retirement that you can use to purchase goods and services you need in the future. In addition, while the insurance company will typically charge an interest rate on a loan taken against an IUL policy, the loan does not necessarily have to be repaid during the insured's lifetime. If, for instance, the insured passes away while there is still a loan balance due, funds from the death benefit are simply used for paying it off. The remaining death benefit proceeds will then be paid out (income-tax-free) to the policy's beneficiary(ies).
IUL2021IULandRet [email protected] • indexeduniversal.life • 800-743-9221 33 Roth IRA vs. IUL Roth IRA IUL Plan Funding After-tax dollars After-tax dollars Contribution Limit Annual maximum contribution No annual maximum contribution Growth in the Account Tax-free growth Tax-deferred growth Risk Subject to market risk Offers a "floor" in times of poor market/index performance, as well as the opportunity to generate higher returns when the tracked index(es) performs well Distribution Requirements No required minimum distribution at any age No required distributions at any age Taxability of Withdrawals Tax-free (provided funds have met the time requirements in the account) Tax-free loan (which may not have to be repaid during the insured's lifetime)
IUL2021IULandRet [email protected] • indexeduniversal.life • 800-743-9221 34 Given all of the positive features associated with indexed universal life insurance, you may want to consider this type of coverage if you fall into one or more of the following scenarios: • You want to secure permanent death benefit protection for your loved ones or for business succession requirements • You are looking for additional alternatives that can generate tax-deferred growth (even if you have already “maxed out” the annual contributions to an IRA or employer-sponsored retirement plan) • You want the opportunity to generate higher growth than whole life, and regular universal life insurance can offer, yet also want to have the assurance that principal will be safe – even if the stock market incurs a “correction” • You are in relatively good health (in order to qualify for the death benefit coverage) • You want to have some additional alternatives for tax-free retirement income Even so, the only way to really know if indexed universal life insurance is right for you is to consider your specific situation and to then determine whether or not IUL could be a good solution for your needs. If it is the right financial tool for you, the next step is to narrow down which IUL policy is best. While indexed universal life insurance plans are structured similarly, not all IUL policies are the same. Working with an advisor focused on retirement planning and someone well-versed in life insurance strategies is highly recommended. That way, you can be better able to narrow down the right policy from the best insurance carrier and compare the premiums. Does Indexed Universal Life Insurance Belong in Your Retirement Plan?
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