The Ultimate Tax-Free Retirement Guide
What is Indexed Universal Life Insurance (IUL)?Here's some stuff
How does an IUL work?
How annuities work?
Pros and cons of Annuities
How to determine which annuity is right for you
What Is Indexed Universal Life Insurance?
Indexed universal life insurance is a type of permanent life insurance. It stays in force as long as you stay current on your premium payments or until you reach the maturity date specified in the policy. Many IULs mature when the insured person reaches age 121.
Indexed universal life insurance has a cash value component where the gains and losses are tied to an index like the S&P 500. While the cash value rises and falls with the index, the insurance company actually invests in things like bonds and mortgages.
You can borrow against your cash value through a policy loan or withdraw cash value. When you die, your beneficiaries receive a death benefit, but the death benefit amount will be reduced by any loans not paid back or withdrawals you’ve taken from the cash value.
Universal life insurance sometimes has added flexibility to change your death benefits and/or premium payments, but only within specified limits. The main difference between indexed universal life insurance and other universal life insurance policies is how cash value accumulates.
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The Ultimate Tax-Free Retirement Guide
What is Indexed Universal Life Insurance (IUL)?Here's some stuff
How does an IUL work?
What is Infinite banking?
Pros and cons of IUL
How to determine which IUL is
right for you
Answer a few basic questions below to find out how much tax-free retirement income you could create
What Is Indexed Universal Life Insurance?
Indexed universal life insurance is a type of permanent life insurance. It stays in force as long as you stay current on your premium payments or until you reach the maturity date specified in the policy. Many IULs mature when the insured person reaches age 121.
Indexed universal life insurance has a cash value component where the gains and losses are tied to an index like the S&P 500. While the cash value rises and falls with the index, the index universal life insurance companies actually invest in things like bonds and mortgages.
You can borrow against your cash value through a policy loan or withdraw cash value. When you die, your beneficiaries receive a death benefit, but the death benefit amount will be reduced by any loans not paid back or withdrawals you’ve taken from the cash value.
Universal life insurance sometimes has added flexibility to change your death benefits and/or premium payments, but only within specified limits. The main difference between indexed universal life insurance and other universal life insurance policies is how cash value accumulates.
What is Infinite banking?
Infinite banking, also known as the Bank on Yourself concept, is a financial strategy that involves using permanent life insurance, such as whole life insurance, as a personal bank account. This strategy aims to help individuals achieve financial freedom by relying on the cash value of their life insurance policies instead of traditional banking products.
GUL insurance policies, offered by various guaranteed universal life insurance companies, provide a death benefit and cash value growth with a guaranteed minimum interest rate. Some policyholders use these policies within the Infinite Banking concept, leveraging the cash value to create a source for personal financing and loans while maintaining life insurance coverage.
Key Principles of Infinite Banking:
Overfunding the Policy: Policyholders contribute more than the required premiums to their life insurance policies, allowing the cash value to grow faster.
Loans Against Cash Value: Instead of borrowing from traditional lenders, policyholders take out loans against the cash value of their life insurance policies.
Self-Banking: Policyholders manage their own finances, treating their life insurance policies as their personal banks.
Potential Benefits of Infinite Banking:
Access to Liquidity: Policyholders can access funds through loans without relying on external sources.
Control Over Finances: Individuals gain control over their finances and can make informed decisions.
Potential Tax Advantages: Life insurance policies offer certain tax benefits, such as tax-deferred growth and potential death benefit exclusion.
Considerations and Potential Drawbacks:
Initial Costs: Setting up and maintaining a whole life insurance policy can be expensive.
Limited Investment Returns: The growth of cash value may not match the potential returns of other investments.
Complexity: Understanding and implementing the infinite banking strategy can be complex.
Suitability of Infinite Banking:
nfinite banking may not be suitable for everyone, and it's crucial to carefully consider its potential benefits and drawbacks before making a decision. Individuals should consult with a qualified financial advisor to determine if infinite banking aligns with their financial goals and circumstances.
How Does Indexed Universal Life Insurance Work?
When you pay the premiums on permanent life insurance, a chunk of that money goes toward the death benefit. Another portion pays for the administrative costs of your policy and the actual cost of insuring you. The rest is directed toward your cash value account.
The death benefit is paid tax-free to your beneficiary. The life insurance payout typically does not include payment of the cash value to your beneficiaries.
Cash value accumulation:
The cash value portion of an IUL policy is not as volatile as the stock market, explains Eric Tarnow, head of products for AIG Life U.S. For example, variable universal life insurance is more tied to market fluctuations.
Instead, the cash value of an IUL policy is tied to the performance of an underlying index, such as the S&P 500 or the Nasdaq composite. “But consumers do not directly invest in that index,” Tarnow says. The best IUL insurance companies use the index’s rate of return to determine how much the account should be credited.
You can typically choose from one or several indices, depending on the insurance company. Tarnow notes that most IUL products also offer a fixed (declared) interest rate option in addition to the index-linked investment.
Floors, caps and participation rates:
The cash value within an IUL won’t mirror an index’s exact gains and losses.
Floor: You’ll find there is a floor in place, which is the minimum rate that will be credited to your cash value. Your floor could be 0%, but that will protect you from losses.
Cap: On the flip side, there is usually a cap, meaning your cash value gains won’t go above a certain percent— even if the index performs above that threshold. For example, if your cap is 10%, and the index goes up 12%, the cash value tied to that index increases by 10%.
Participation rate:
Your cash value gains are also calculated according to the “participation rate,” which is set by the insurance company. This is the portion of the index’s return that is credited to your account. It can often range anywhere from 25% to above 100%. If the IUL has a participation rate of 100%, you will earn all of the interest gained by your investments, up to your cap.
Another example is if the participation rate is 50% and the index gained 10% for the month, you’d actually earn 5% for the period. Though the growth is often tracked monthly, the cash value earnings are usually credited to the account once per year or every five years.
Though the internal policy expenses are deducted monthly, the cash value earnings are only credited to your account at the end of the “segment period” you selected. This could be as long as nine years but is most often once per year and can be as frequently as monthly if you elected dollar cost averaging (DCA).
This means your Annual Policy Statement could show no earnings even in an up market if the end date of the selected segment period is after the date of your Annual Policy Statement. “But that doesn’t mean your policy isn’t performing as expected,” points out Barry Flagg, president and founder of insurance analytics firm Veralytic.
While the floor cannot be changed throughout your policy, your insurer will change the cap and/or participation rate in response to changes in market conditions (such as changes in prevailing interest rates, the degree of equity market volatility, and the cost of options in the derivatives market).
Flexible premiums and death benefit:
You have the option to adjust your premiums and death benefit amount if needed. If your account accumulates enough value, you could use those funds to pay your premiums.
If you decide to underpay or even skip a premium, the cost of insurance charges and policy expenses will nonetheless be pulled directly from your cash value account every month. So long as the cash value account is sufficient to cover these monthly deductions, then the policy will remain in force and death benefits would continue to be payable.
On the other hand, there may be instances when you are required to pay more in premiums than you expected. For example, if the index performs poorly, the subtraction of monthly policy charges could cause the cash value to drop and your policy could lapse without an infusion of more premium. If your cash value falls too much, the insurance company could put out a “premium call,” meaning you need to put in more money to avoid a policy lapse.
If your policy lapses, you lose out on all the money you put in, plus the death benefit.
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Pros and Cons of Indexed Universal Life Insurance
Indexed universal life insurance is fairly complex, so it’s important to understand how it works before committing to a policy. Here’s a recap of the major pros and cons discussed below.
The Pros
Flexibility with payments and death benefits
Potential for investment gains but with limited risk
Tax-free retirement income via policy loans
Unlimited contributions
Cash-value accumulation
The Cons
High fees may eat into your cash value
Rate caps could limit your earnings potential
Cash value withdrawals (not policy loans) could be taxable if they contain money from investment gains
Possible policy lapse due to poor setup
Tax-Free Income
Like all forms of cash value life insurance, indexed universal life insurance enjoys several tax benefits. One critical benefit for those seeking to use life insurance to create retirement income is the ability to keep all income created by an indexed universal life insurance policy tax-free in the form of policy loans.
As opposed to taking withdrawals from the policy, which is a taxable event on any policy gains, a loan is not a taxable event. This is one of the benefits that makes a properly setup Indexed Universal Life Insurance such a powerful retirement vehicle.
The income you create from a life insurance policy also does not count towards provision income.
This means it will not affect the taxability of your Social Security earnings.
This is all made possible because of the ability to take out loans against your policy (not taxable), which is different from withdrawals (taxable).
When set up correctly, the cash value that accumulates in your policy can allow you to consistently take loans against your policy later on down the road and create significant income that is tax-free.
Protection Against Stock Market Volatility
Indexed universal life insurance accumulates cash values based on premiums you pay and an interest paid on the cash value created by those premiums.
The actual interest rate depends on the movement in an index (usually a stock index) over a certain period of time (most commonly one year).
But despite paying interest commensurate with movement in a stock index, indexed universal life insurance does not decline in value if the market is down.
In fact, all indexed universal life insurance policies have a minimum accumulation guarantee. The unique functionality of indexed universal life insurance ensures against losses.
This protects you from losing money when the economy takes a turn in an undesirable direction.
The downside of this benefit is that the rate of growth is capped at a certain percentage rate.
Meaning if the stock market goes up 10% in one year, you may only get 4-7% of that move credited to your policy.
Like most financial vehicles, there are pros and cons, give and take with everything.
When it comes to retirement though, many would rather sacrifice some of their potential gains to make sure their nest egg doesn't lose massive amounts of value during economic uncertainty.
Is Indexed Universal Life Insurance Right for You?
There are many different factors when it comes to deciding whether an Indexed Universal Life Insurance policy is right for you.
This is why we strongly recommend requesting a FREE Custom Tax-Free Retirement Plan to help you determine whether or not this financial vehicle is right for you (just click the button below).
For the average person, an IUL is unnecessarily complex. If you’re planning for retirement, you might be better off funnelling your savings into a 401(k) or IRA. While those accounts are subject to contribution limits and don’t have the same principal guarantees, you’ll see more money when the market is performing well.
However, if you’re a high-income earner, the tax benefits of an IUL may be worth the cost of the policy. The same goes for long-term investors who are okay with potentially low returns in less-than-stellar years.
It is typically a good fit for people who want to participate in market performance but who may not want to have full financial exposure to market downturns.
We hope this guide gave you some clarity about how IUL's work. Your next step is to request your FREE Custom Tax-Free Retirement Plan by clicking the button below to see if this type of policy is right for you.
How to Get Started
Clients initiate the process by completing a lead form expressing interest in IUL or the Infinite Banking concept. Subsequently, our agent engages in a pre-qualification discussion, understanding the client's goals, budget, and health status to determine eligibility and suitable coverage.
Following this, the agent submits an application to IUL insurance companies for approval. Once approved, clients select a payment date, and their policy commences, with the entire procedure typically spanning from a day to a few weeks.
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FAQ
What is an Indexed Universal Life policy?
An IUL policy is a type of permanent life insurance that combines death benefit protection with the opportunity to grow cash value based on the performance of a specified market index.
How does an IUL policy work?
With an IUL policy, a portion of your premium payments goes toward the death benefit, while the rest goes into a cash value account. This account can be linked to a stock market index, and the gains in your cash value account are determined by the performance of that index. Avg 6-10% per year.
How are gains credited to an IUL policy?
The insurance company uses a method called crediting to determine how much to increase your cash value based on the index's performance. At no time will your rate be lower than 0%.
What happens if the market goes down?
One of the key features of an IUL policy is a guaranteed minimum interest rate or a floor. This means your account won't lose value due to poor market performance.
Can I access the cash value in my IUL policy?
Yes, you can access the cash value through policy loans or withdrawals, but these can potentially decrease the death benefit.
What happens if I stop paying premiums?
If there's enough cash value, the policy can remain in force for a while by using the cash value to cover premiums. However, if the cash value is depleted, the policy could lapse.
Are there any tax advantages with an IUL policy?
Yes, the death benefit is generally tax-free to beneficiaries. Additionally, the cash value grows on a tax-deferred basis, and policy loans or withdrawals can also be tax-free if handled properly.
Can I lose my coverage if my health changes?
No, once issued, as long as premiums are paid, the policy remains in force, regardless of any changes in health status.
Can I increase or decrease my death benefit?
Yes, most IUL policies offer flexibility in adjusting the death benefit, subject to approval by the insurance company and potentially a new underwriting process.
Can I add additional riders to my IUL policy?
Yes, many companies offer additional riders that can enhance your policy, such as long-term care riders, critical illness riders, or accidental death benefit riders.
Is an IUL policy a good investment?
IUL policies can provide an opportunity for cash value growth tied to market performance, but they aren't traditional investments. They're insurance products with an investment-like component.
What are the fees associated with an IUL policy?
Fees can include a cost of insurance charge, policy administrative charges, premium load, and surrender charges.
What is a surrender period in an IUL policy?
This is a set period during which you would have to pay a fee to the insurance company if you surrender (or cancel) the policy.
What happens to the cash value when I die?
Upon death, the chosen beneficiary typically receives the death benefit. Any remaining cash value generally goes back to the insurance company, unless you have a rider specifying otherwise.
Is an IUL right for me?
That depends on your unique financial goals, your need for life insurance, and your willingness to accept some level of risk associated with the index.
What indices can my IUL policy be linked to?
This depends on the specific product and insurance company. Common indices include the S&P 500, Nasdaq 100, and others. Each policy will specify the index or indices it uses.
What is a policy cap in an IUL?
A policy cap, or cap rate, is the maximum rate of return the insurance company credits to your policy in a specified period, regardless of how well the index performs. Not all policies have them.
What's the difference between an IUL and a Whole Life policy?
While both are forms of permanent life insurance, a Whole Life policy offers a fixed interest rate for cash value growth, whereas an IUL policy's cash value is linked to a market index's performance. The premium is typically more flexible in an IUL policy compared to a Whole Life policy.
What's the difference between an IUL and a Variable Universal Life (VUL) policy?
Both IUL and VUL allow for cash value growth, but while an IUL ties cash value growth to a market index with a floor protecting against market downturns, a VUL allows the policyholder to invest in specific sub-accounts similar to mutual funds, which could incur a loss in value due to market downturns.
Can I change the amount I pay in premiums?
Yes, IUL policies are typically flexible. You may be able to increase or decrease your premium payments within certain limits.
How can I use the cash value in my policy?
The cash value can be used for any purpose you wish, such as supplementing retirement income, paying for college, covering unexpected expenses, or even taking a vacation. Keep in mind that loans and withdrawals may impact the death benefit and could have tax consequences.
What happens if I surrender my policy early?
Surrendering the policy early could result in surrender charges, and you may also have to pay taxes on any gains. It could also leave you without the insurance coverage.
Will my premiums increase with age?
The cost of insurance within the policy may increase with age, but your premium may remain level if structured properly. This depends on the specifics of your policy and how it was set up.
What is a participation rate in an IUL policy?
The participation rate determines what percentage of the index's performance will be used to calculate the index credit. If the participation rate is 80% and the index return is 10%, your index credit would be 8%.
Does an IUL policy offer any guarantees?
Most IUL policies provide a death benefit guarantee and a guaranteed minimum interest rate or floor to protect your cash value against negative market returns. Some policies offer a guaranteed return of premium after 20 years.
Testimonials
"I had the pleasure of working with Disciples Financial to plan my retirement and secure my financial future. Their expertise and guidance helped me navigate the complexities of financial planning, and their innovative Indexed Universal Life (IUL) policy provided me with a reliable and secure investment option. Thanks to Disciples Financial, I have seen significant growth in my investments and now have peace of mind knowing that my future is well-protected."
John Anderson, 36
CEO of Financial Companion
"Disciples Financial has been instrumental in helping me achieve my financial goals. As a business owner, I was looking for a reliable and flexible investment option that could provide long-term benefits. The team at Disciples Financial introduced me to their IUL policy, and I was amazed by its versatility and potential for growth. Thanks to their strategic planning and personalized approach, my investments have grown exponentially, allowing me to expand my business and secure a brighter future for myself and my family."
Sarah Roberts
Founder of B42 Enterprises
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