Indexed universal life insurance can be a good choice for retirement, but you should understand that it works as an option to supplement your investments and other retirement planning tools. The three main things that make indexed universal life insurance a powerful tool for retirement are:
- Its protection against losses
- Its ability to produce tax-free pension income
- Its ability to drive somewhat more aggressive returns regardless of your age
Protection against losses
Indexed universal life insurance accumulates cash values based on premiums you pay and an interest paid on the cash value created by these premiums. The actual interest rate depends on the movement of an index (usually a stock index) over a certain period of time (usually one year).
But despite the fact that interest is paid in proportion to movement in a stock index, indexed universal life insurance does not decrease in value if the market is down. In fact, all indexed universal life insurance policies have a minimum accumulation guarantee. The unique functionality of an indexed universal life insurance policy ensures losses. This protects you from losing money when the economy turns in an unwanted direction.
Like all forms of cash value life insurance, indexed universal life insurance has several tax benefits. An important benefit for those who want to use life insurance to create pension income is the ability to keep all income created by an indexed universal life insurance tax free.
Free income from life insurance has more consequences than just not having to send a check to Uncle Sam on the money you withdraw from the life insurance policy. The income you create from a life insurance is not included in the sales income. This means that it will not affect the taxation of your social security income.
More aggressive returns in advanced age
The indexing function mentioned above can give a very high return for a fixed interest rate savings plan. Many indexed universal life insurances available today have the potential to produce a low double-digit interest payment on the insurance owners' cash value. Indexed universal life policies can do this and still protect your cash value from losses if the market falls.
For a moment, imagine owning an indexed universal life insurance policy with $ 500,000 in cash value. The market is up for the year and you earn 10% on this cash value. That means you earn $ 50,000 in interest that will add to your cash value.
Investments or other savings plans that have the potential to achieve this type of return also require you to accept the risk of losing some or all of the money you have saved in the plan. This is not the case with indexed universal life insurance. You can continue to strive for a low double-digit return on your money all the time and know that the worst case scenario if you do not earn any interest in a given year (this can lead to a small net loss for the year due to insurance costs is covered by your cash value, but you can always find out what this amount is and it will never be close to your cash value in the insurance.
Will indexed universal life insurance guarantee income?  No, indexed universal life insurance does not in itself guarantee income. however, provides an extremely stable income because it lacks the negative exposure to the loss mentioned above.
That said, if you absolutely need guaranteed income from savings or an investment, you are probably best served by an annuity. that the non-guaranteed but still very stable income you can create with an indexed universal life insurance is higher than the gara income generated by an annuity.
If you use a loan or take out a withdrawal to get income from the indexed Life Insurance?
For indexed universal life insurance, you will almost always use loans for income generation. Indexed life policies with an "indexed loan function" will certainly offer an attractive way to create income through an insurance loan. These types of loans allow you to stay in the index while taking out a loan against the policy. This creates the potential to earn more on the money you invested in the loan than the loan interest that accumulates on that money.
Withdrawals are rarely used for income generation with general life insurance due to the indexed loan function. Many universal life insurances also offer other loan features that give the insurance owner more benefits than just withdrawing cash from the insurance.
To be clear, you can take out money from a general life insurance policy if you want to. But doing this is probably less optimal than using the loan features that you have available.
Do you have to repay the loans you take out to generate income?
No, you do not have to repay the loans taken to create a pension income from a life insurance policy. As long as the insurer dies while the policy is still in force, the death benefit for the policy will pay off the loans and the rest will go to the beneficiaries.
This planned result will also ensure that all income generated by life insurance remains tax-free.
What is the best way to design an indexed universal life insurance policy to give good results for retirement?
While indexed universal life insurance can be an excellent option for retirement planning, you need to make sure you have the right type of policy and proper implementation of the policy to get the right results. If you do not buy the right type of insurance, or if your agent formulates the policy incorrectly, it will not work well, and you may end up costing yourself thousands in a poorly executed policy.
The right design seeks to optimize the cash value accumulation function in the policy and suppress the death benefit as much as possible. The right circumstances to take advantage of an indexed universal life insurance as a retirement vehicle are those with above-average incomes, who have the disposable income that allows them to invest $ 10,000 in insurance annually (at least), and who have either fully used or at least understand the other options available for retirement planning.
How much income can I create with an IUF insurance?
Here is an example of an indexed universal life insurance policy for a 40-year-old man who puts $ 20,000 per year into the policy until he retires at age 65. He then begins to use the policy to generate income at retirement:
This book shows us that he can start generating income for a amount of $ 81,900 at age 66. This amount of income projects to his age 100 (not shown in the general ledger).
The reported income is free of income tax liability and regardless of financial circumstances, this insurer knows that he will never have a year for the insurance to decrease in value by any wrong amount such as 20%. The worst he can do is actually 1% earned interest on his cash value (that's the lowest on this particular indexed universal life insurance policy).
As you can see from all this, indexed universal life insurance is a pretty good tool. for pension planning. It complements other options (such as your 401k, IRA, etc) very well. It provides an incredible degree of stability as it limits losses when markets become negative. Finally, it benefits from special tax treatment that significantly enhances what you can ultimately achieve in terms of real purchasing power from the policy's cash value and / or death benefit.