IUL – What you need to know

Indexed Universal Life Insurance – Upside potential and downside protection all in one solution to supplement your retirement. This is one of our most powerful, popular and flexible retirement solutions available. These benefits are something your 401k, 403b, 457, and IRA cannot do.

• Tax-free income due to IRS tax code exemption. This is HUGE and make sure that your financial professional runs a tax analysis comparison so you can see the big benefit of Tax-Free Retirement income.
• No market risk – Zero is your hero.
• Your investment won’t spend any time making up for market losses.
• Die too soon – death benefit for your family
• Live too long – Cash available to supplement your retirement or for unexpected family needs that come up.
• Become ill – You can access a portion of the death benefit to pay for living or medical expenses.
• Liquidity for emergencies and when life happens.
• Liquidity for business owners for business emergencies or growth opportunities.

IUL not structured or funded properly – The single biggest risk people have when it comes to IUL’s is working with a financial advisor or life insurance agent who is not properly trained, educated, or experienced with IUL’s.  Just because they can offer them does not mean they know how to guide you to choose the right IUL or how to structure it properly to meet your needs for retirement purposes.

An IUL is one of the most powerful and flexible tools that can be structured to meet various needs.  It is important to work with a professional who understands all the working components and can structure them properly for you to meet your needs. If you were to choose a home remodeling contractor you would do everything you can to choose the right contractor.  Just because they are contractors and have tools doesn’t mean they have the experience to use the tools to meet the needs of your project.  Same philosophy applies to financial professionals.  

There is a big difference between an IUL that is structured properly and an IUL that is not. When people say IUL’s are bad it’s because their experience is with someone who did not structure it properly, therefore, it doesn’t perform as expected.

Lapse risk – If the IUL is not funded properly you run the risk of the policy lapsing because there is not enough money being allocated to the cash bucket and your premium is only going toward the cost of insurance. If it is not funded properly the policy will lapse leaving you with nothing but a death benefit.

How does Whole Life insurance compare to an Indexed Univeral Life? Like an IUL, Whole Life policies provide a safe place for you to set aside your money where it can grow tax-deferred. Also like an IUL you can access your money through tax-free loans or tax-free withdrawals up to basis (and then pay taxes on any money taken out over and above basis), and your heirs will receive an income-tax-free death benefit upon your passing.

Whole Life insurance you can receive dividends, which you can reinvest into the policy to increase the cash value and death benefit. With an IUL you do not receive dividends, and once it is maximum-funded, you cannot add more money into the policy. 

Whole Life policies also come with guarantees: a guaranteed cash value and a guaranteed death benefit amount. The IUL’s cash value can vary, growing in market up-years and remaining stable during down-years (based on your index performance, with the protection of a 0% floor during market downturns). The IUL’s death benefit can increase due to policy performance and can decrease if there are any outstanding loans or if you make adjustments to your policy to save on costs.

One thing to keep in mind is that whenever a company builds guarantees into a financial vehicle, those guarantees come at a price. Generally, Whole Life policies are more expensive than compared to an IUL that is structured properly.

And even more challenging, Whole Life expenses and surrender charges
are often not clearly disclosed, so you also have less transparency with
Whole Life policies than an IUL.  For example, Say you have a setback to your income while you are in the midst of funding your policy, and you cannot make your premium payment. You are expected to pay your Whole Life premium each year. If you don’t make that payment, the policy can lapse or go into what’s called a non-forfeiture option (such as extended-term insurance or a premium loan which allows you to take money out of cash value to pay the premium).

With an IUL, you have enormous flexibility when funding your policy. You can miss a year or two and catch up. Or say you’re only able to fund it 50%, you can work with your financial professional to make adjustments, still enjoy tax-free access to the money in your policy, and pass along an income-tax-free death benefit to your beneficiaries.

When it comes to accessing money from your policy, the interest rate on Whole Life policy loans tends to be higher than the policy’s interest crediting rate. To explain, let’s say your Whole Life policy is currently earning 4% interest. You borrow $10,000 from your Whole Life policy. Loan rates are typically 1% to 2% higher than crediting rates, so you end up paying 5% or 6% on that $10,000. If you do not repay that loan, over time this can create a situation where the policy loan is increasing faster than the cash value. If your policy does not have an over-loan protection rider, this can cause the policy to lapse, which can be disastrous from a tax perspective.

We had a client, for example, who came to us after his Whole Life policy had lapsed. He told us that he had received a 1099 that year for $199,000 (which would have been the amount of cash value over and above what he paid in premiums). He did not have the cash on hand to pay the taxes, so not only did he no longer have a Whole Life policy, but he also had to get a home equity loan just to pay Uncle Sam.

Overall, Whole Life policies do have some merits, especially when compared to traditional financial vehicles that are at risk in the market, but they also have some limitations when compared to an IUL. Make sure to explore your options carefully when deciding which financial vehicles you will include in your financial portfolio.

This description was taken from the book Laser Fund by Doug Andrew. Doug Andrew is recognized as one of the top experts with IUL’s. 

In an IIUL your money is not in the market.  It’s a contract with a life insurance company that provides you with a floor of 0%.  You participate and benefit when the market goes up with interest that is credited to your account (based on the index you choose with your IUL). If the market is negative any gains you realized are locked in and never go backward due to the market downturn.

If the market dives your gains are locked in and can not go backwards.

Steady consistent growth is the key to a successful retirement.

There are some bad IUL’s and there are some great IUL’s.  When some says they are bad it’s most likely because they don’t understand how something really works. The reason we focus on educating you is so you’ll know the differences between a bad and good IUL.  IUL’s are not always the right solution for everyone and it requires you to work with a financial professional who has access to several different IUL providers and products. 

If your financial advisor says IUL’s are bad ask these key questions to determine their experience. 

1. Do you offer IUL’s and how many have you placed in the past year with other clients?
2. When you say they are bad what type of IUL’s are you talking about?
3. If you are so against an IUL then what other type of retirement income solution is available that can do the following?

• Provide me with a Tax-Free retirement.
• Income received won’t increase my taxable income.
• Contribute more than the traditional $6,000 per year.
• No market risk.
• Available to borrow money without penalties before age 59.5.
• Plus, provide a death benefit and living benefits if life happens to protect my family and retirement.

Where your 401k, IRA, and traditional retirement accounts have limits on how much you can contribute per year an IUL has no max limits.  The limitation will be based on how the IUL is structured at the time you purchase one based on your age, and how much you ultimately want to fund it with overtime. 

This makes the IUL an ideal retirement solution option for high-income earners who want to put away more each year and at the same time have access to their money without IRS penalties if needed. Business owners, executives, and high-income earners love IUL’s because there is simply not another product available that can do what an IUL does.  

For high-networth individuals who need a financial vehicle to put away more for retirement, there are additional options such as Premium Financing.  Premium financing is where a bank will finance the premiums for an IUL for a fixed term such as 5 to 15 years.  At the end of the term, the IUL has a significant cash value that you own and was paid in part with bank financing.  This allows an individual to accumulate a larger cash value in their policy. This is can be anywhere from $50,000 a $1,000,000. Speak with your financial professional for more details about premium financing. 

Who an IUL is ideal for is based primarily on the individual and what you want the IUL to do for you.  It can be used as a retirement solution for someone during their working years.  It can be used to fund a child’s college as an alternative to a 529. It can be used for legacy planning to pass on to your loved ones. And lastly, we find many high-income earners and business owners who utilize an IUL to put away more for retirement than what the traditional plans allow while having access to cash during their working years.  

Age – As a general rule, an IUL is ideal for those typically up to age 60 when planning to fund it monthly or annually.  Certain cases for those over age 60 with a single premium can be a viable option based on your unique situation.  

Time – Ideally, you need 12 to 15 years of proper funding to allow time for growth. The variables that make each IUL unique are based on your age, how much you want to fund the IUL with, monthly or yearly, and when you would like to retire.  

This is a powerful benefit that can provide additional income and retirement protection for you and your family.

Living Benefits or Accelerated benefits are additional protection benefits to cover terminal illness or major illnesses (cancer, heart attack, or stroke) while you are alive.  Coverage options vary based on the insurance carrier and state.  

For example, if you are diagnosed with a terminal illness or a major illness the insurance company would allow you to accelerate the death benefit (pay you an amount) up to a certain amount. Some companies offer 100% accelerated benefits up to $2,000,000.  No one likes to think about a major illness happening but it does and if it does would it be nice to know that you have this option to cover medical expenses, and day to day living expenses during this time of need.

The index options are linked to a market index, but you are not investing directly in the stock market or any index. You are protected from downside risk, and you are guaranteed not to lose money due to market declines. At the end of each crediting period, any gains are locked in. 

Each insurance carrier will have its own index strategy options available for you to choose along with a fixed index strategy.  You can choose one or multiple options to meet your financial objectives.

There are fees with IUL’s just like any other retirement product there are fees.  Your mutual fund has fees, your financial advisor charges you a management fee or trade fee, or a font load or backend load fee.  

Anyone in the financial services business is in business to make money. It doesn’t matter if it is the company that oversees your employer pension or an individual advisor you are working with. They charge fees to you and the employer for managing.  Your bank charges fees.  Anytime you have money that is being managed or moved there will always be fees. Some people and organizations may not be transparent about the fees they are charging so you may not realize it.

An IUL structured properly with the right company will have much less fees than what your financial advisor charges over the course of managing your money. When you work with our retire happy professionals we can run a fee analysis and show you a comparison. 

Here are the typical expenses and fees in an IUL.  Fees are typically higher in the early years and decline in later years.  The overall fees are much less than those of a traditionally managed retirement account. 

Cost of life insurance.  A portion of what you pay goes towards the cost of life insurance which is required by the IRS to have the ability to take your money tax-free as loans.  The IRS requires a certain amount of death benefit based on how much cash you would like to fund your IUL with. 

Premium / Expense fees – This is a fee the life insurance company charges to manage the IUL.  

Rider fees – If you choose to add any additional riders to the policy there may be an additional fee associated with the rider.

Surrender fees – If you choose to cancel the policy and surrender it there is a surrender fee.  This is clearly stated in the IUL illustration.  You have an account value and surrender value.  The surrender value is the value after the surrender fee has been deducted. 

Loan expense fees – When you take a loan there will be an interest loan fee.  Make sure you know what this is ahead of time before you commit to an IUL.  Some companies have a higher interest rate than others. 

You should not go into an IUL if you are thinking of having for just a few short years or giving it a try.  This product is designed to benefit you the most when you look at it as a long-term solution like you would with your employer 401k or pension.  

Important note: If your IUL is not structured properly, and the index returns a 0, and you have rider fees and or loan fees, you could potentially lose cash value due to the fees and cost of insurance.  It is not the same as market risk.  

No, it is not recommended.  Proper planning for retirement income is about diversifying your retirement income portfolio.  In working with your financial professional it is best to determine based on your retirement risk score, other retirement accounts you have, your retirement age, life expectancy, and other factors to determine how much of your retirement savings should be allocated to an IUL. 

• $300,000 in life insurance death benefits
• $100,000 in cash surrender or withdrawal values for life insurance
• $250,000 in present value of annuity benefits, including net cash surrender/withdrawal values
• $500,000 in major medical or basic hospital, medical and surgical insurance policy benefits
• $300,000 in long-term care insurance policy benefits
• $300,000 in disability insurance policy benefits
• $100,000 in other health insurance benefits

Any cash accumulation growth realized in your IUL grows tax-deferred, not tax-free. It’s how you take the money out of your IUL that allows you to enjoy it tax free.  Money is taken out in the form of a policy loan which there is no income tax assessed on loans.  Upon your death, the loan is repaid from the death benefit of the life insurance policy.  You never pay the loan back in your lifetime nor do your beneficiaries.  It’s a beautiful thing. 

Loans taken from your policy ARE NOT TAXED. Because ever since the 1986 tax reform, taxpayers pay income tax on only three types of income (see Section 7702 of the Internal Revenue Code): 

1. Earned income – This is money that you earn by working,
including wages, salaries, and bonuses.
2. Passive income – This would be the type of income you
receive from renting or leasing property.
3. Portfolio income – This comes in the form of interest and
dividends.

Now, if you choose to surrender your policy while you are alive then you are subject to paying taxes on the gains. 

When shopping for an IUL here are some key points to keep in mind. 

1. Make sure you are working with a licensed agent who is very knowledgeable and specializes in IUL’s.  Just because a financial advisor or licensed agent has the license to sell an IUL it doesn’t mean they know how to structure it properly for you.  This is the #1 risk you have with an IUL.  See the tip below on how to spot an agent who is not an expert. 
2. Verify the credentials of the person you are working with by going to the state insurance commissioner’s website to verify their license or have them show you a copy of their state license.   For example, here is the California Department of Insurance.  http://www.insurance.ca.gov/  
3. Not all life insurance companies have a great IUL.  Make sure it is a company with a great rating, track record, and is recognized as a leader with IULs.  For example, your auto insurance company offers general insurance but they don’t specialize and are not known to have a great cash value or IUL insurance products.  It’s not their specialty. Our Retire Happy Professionals can recommend a couple of top-rated companies.  
4. Have your financial professional run 2 or 3 different illustrations from multiple companies and educate you on the differences of each IUL.  When they run the report, make sure they include the fees in the illustration.  There are always fees and you need to know what they are so you can choose the right company and IUL for you. You want to know what the cost of loans are, cost of insurance, premium expense fees, policy fees, and surrender fees.  It’s detailed in the illustration. Your brokerage account has fees also.  All financial products have some type of fee to cover the cost of managing.  Don’t let it scare you, just know what they are so you can decide for yourself.
5. Discuss what your objective is with the IUL so your financial professional has a clear understanding.  The IUL is one of the most flexible products but if it is not structured according to your objective then you will end up disappointed. 
6. Plan to fund your IUL properly for the long haul like you would your 401k, pension, or IRA.  You do have some flexibility with the premium if your financial life gets skinny. However, know that if you reduce your planned premium then you won’t accumulate the cash and the fees will continue to be charged in your IUL. 
7. Know the different index strategies, how they work, if there is a fee for the strategy, and if there is a fixed interest option.  A good IUL professional can guide you and educate you on the index for the various IUL’s you are considering and can recommend an index diversification strategy.
8. Know how much death benefit you have and if it increases or remains fixed. In general during the accumulation years, it is typical for the death benefit to increase to avoid the policy from becoming a MEC. The IRS requires a certain amount of life insurance based on the amount of cash accumulation. 
9. Accelerated Death Benefit or Living Benefits. Know what your IUL has and how it works.  Accelerated Death Benefit allows you to accelerate the death benefit, while you are alive if you are diagnosed with certain health risks like terminal illness, cancer, heart attack, or stroke.  Each company has its own criteria and how much you can accelerate and what the triggers are.  Know what it is and how it works for the IUL you are considering.  
10. Know what the target premium, the minimum premium, and the guideline annual premium are and why they are important. The target premium is the planned premium the insurance company recommends based on how the IUL was structured.  The minimum premium is the minimum premium to avoid the policy from lapsing. (Some companies may offer a no-lapse guarantee.)   The guideline annual premium is the max premium you can fund the IUL within a given year without it becoming a Modified Endowment Contract (MEC). There are some exceptions to this and if you think you will exceed the guideline annual premium then discuss with your financial professional. I complete illustration will have all these details included.
11. An IUL is a life insurance product that will require medical underwriting. Some carriers offer non-medical or simplified issue underwriting.  We recommend choosing either the non-medical or fully underwritten if the company provides that option.  If an agent tries to sell you an IUL that is simplified issue underwriting the product will have higher fees and the cost of insurance will be higher.  The life insurance company offers a simplified option that has some benefits like immediate coverage in many cases, but the cost of it is built into the product cost. An IUL structure for retirement purposes is about maximizing the cash value of the policy.  Your premiums and cost of insurance will be higher.  What this means is that more of your money will be going toward the cost of insurance fees and less toward cash accumulation.  Important note… An agent that is trying to push a simplified issue IUL is not an experienced IUL expert that has your best interest in mind.  
12. How to spot an inexperienced agent. a)They say an IUL is a Silver Bullet retirement product.  The IUL when structured properly for the right client is a great tool and offers many benefits like tax-free retirement.  But there is no product, stock, bond, or mutual fund, that is the Silver Bullet of Retirement products.  It’s about aligning the right products based on your objectives and goals so you can create the retirement you dream of. b) They push simplified issue underwriting only which costs you more and they get a bigger commission. c) They can’t or their in-house IUL expert can’t explain the details of the illustration.