There is a common mantra echoed throughout the financial community that “you won’t need Indexed Universal Life insurance in retirement.”
Because you have been such a responsible saver and a prudent investor, it’s probable that you won’t need any sort of life insurance product once you start taking retirement income.
However, below are 4 powerful reasons why you may want some Indexed Universal Life insurance for retirement allocated amongst your portfolio even though you may not necessarily need it.
#1: IUL as a Retirement Risk-Buffer
Although Indexed Universal Life is not completely uncorrelated to the stock market, it has a unique growth methodology where you can get stock market participation without stock market risk. What this means is that IUL offers a contractual 0% floor, protecting against losses in down-market years. So if the S&P 500 experiences a negative return, you simply get 0%. Yet IUL still provides the opportunity to earn up to double-digit returns tracking the S&P 500 index during up-market years.
If there is a market crash and you have a block of assets allocated to Indexed Universal Life insurance during retirement, you could take your immediate income needs from your IUL policy, thereby allowing your stocks and mutual fund accounts to heal. Otherwise, in a down market, you must redeem significantly more shares of your stocks or mutual funds to meet your ongoing standard of living.
Once consumed, these shares can no longer participate in the next market rebound. If you could only wait until the market recovered or better yet achieved new highs, you could redeem far fewer shares of your stocks or mutual funds to produce the exact same income.
Click here or on the video below and jump to minute marker 7:11 to see the profound impact that IUL can have on a safe withdrawal strategy in retirement.
Picture yourself with a pool of assets immune from the crash inside of Indexed Universal Life so you can still enjoy an uninterrupted standard of living during these years while your stock portfolio licks its wounds.
#2: IUL as a Tax-Buffer in Retirement:
Many high-income-earners are unaware that the tax-treatment of Indexed Universal Life is very similar to a Roth Account, only without all the barriers to entry. Because there are no high-income limitations and no $5,500 annual maximum on contributions, IUL is often called “the Roth of the rich.”
So although you may not need any Indexed Universal Life insurance during retirement, you will probably want it for its tax treatment.
Most of your other sources of retirement income will be taxable in some way, shape, or form. None of the following are immune from Uncle Sam:
- Rental Real Estate
- Taxable Brokerage Accounts
- Tax-Deferred Annuities
- Social Security
- Deferred Compensation plans
- Retirement Accounts IRAs, 401(k)s, Profit Sharing Plans, Defined Benefit Pensions, etc.
As tax rates continue to change with the different regimes occupying Congress during your retirement, what if you could “time your tax” by toggling the amount of taxable retirement distributions you want each and every year.
Imagine withdrawing amounts from your taxable sources right up until you reach those really ugly tax-brackets and then supplementing the rest of your desired lifestyle using Indexed Universal Life’s tax-exempt distributions.
The more that tax rates rise for the wealthy, the more you will wish you had assets allocated to IUL. Even though “tax reform” has occurred lowering all the tax brackets somewhat, remember that we are still 20 trillion in debt, and there will be gravity for the pendulum to swing back the other way.
You can either proactively prepare or react and adjust.
#3: IUL for its Death Benefit in Retirement
Once informed about the unique tax and risk-management characteristics of IUL, the death benefit is often the least appealing feature for clients. However, you shouldn’t discount the utility of a permanent death benefit in the context of retirement planning.
Here’s what I mean:
If you knew that you had a guaranteed accounts-receivable that your spouse and children would receive tax-free at your death, wouldn’t you increase your consumption of retirement assets during your lifetime?
Of course, you would!
The existence of a permanent death benefit allows you to more aggressively spend down other assets in your portfolio. Even if you fully exhaust your other accounts shortly before life-expectancy, there would be so much available cash value inside your Indexed Universal Life policy for retirement income. Not to mention you would have an even bigger tax-free death benefit to replace the part of your nest-egg you consumed.
What if you got chronically ill or critically injured?
Statistics show that one out of two retirees will need some sort of “Long-Term Care” whether in a facility or in the comfort of their own home.
Did you know that certain Indexed Universal Life policies have special riders or policy stipulations allowing you to legally access the tax-free death benefit for these reasons even though you haven’t died?
The finer details will vary by product and company, but these provisions are becoming more and more common with Indexed Universal Life.
#4: IUL as a Better Holding Tank for Pre-Retirement Liquidity
Everyone needs to keep a certain amount of safe and liquid cash reserves, especially on the way to retirement.
If you’re a real estate investor or business owner, you probably have considerably more money in cash than you do invested in the stock market. Even for W-2 employees, the rule of the thumb is to have somewhere between 6-12 months of expenses in cash.
That way you can tap your reserves without worrying about any kind of losses. Usually, when cash is truly king, the sky is falling everywhere else. Keeping 5 or 6 figures parked in cash creates a lost opportunity cost, meaning you’re costing yourself all the growth that you could be earning on that money.
What if you used IUL as the receptacle for your safe and liquid reserves instead?
What if you kept just enough in your checking account to manage your month to month expenses, while your longer-term reserves were compounding safely inside of IUL?
Did you know that the two biggest banks in America each have over $20 Billion Dollars of their customers’ deposits invested in Life Insurance policies taken out on their key executives?
That’s why our site is called BankingTruths.com and our motto is “Don’t do what banks say…Do what they do!”
The major banks know that properly-structured life insurance is the only way to simultaneously keep money liquid while growing it without taxes or market risk.
Let’s not forget too, that being liquid at the right time can substantiality boost your retirement nest-egg. Think about all the opportunities you could have capitalized on if you were highly liquid following the crash of 2008. What’s not actionable is to cash out stocks that lost 50% to buy depressed real estate or vice-versa.
Maybe if your cash equivalents actually got some kind of decent growth rate (like it can in IUL), you wouldn’t mind keeping more of your assets safe and liquid. There’d be no need to press in good years since your IUL wins in those years too, and no need to panic when the sky starts falling again. Simply wait for the pandemonium to set in, and scoop up the best real estate deals of your life.
Click here to watch a 6-minute video on how to take this big institutional thinking down to the personal and small business level.
Imagine the positive impact on your retirement if you had all your assets working for you all the time, even your safe and liquid cash…or cash value rather. You would be well-positioned to capitalize on timely opportunities whenever the sky does start falling again, without the lost opportunity cost while you wait.
Most people overlook the unique utility that Indexed Universal Life can provide to clients wanting to maximize their net-spendable income throughout retirement. IUL’s rare growth methodology and favorable tax treatment make it the ideal complement to a diversified portfolio of retirement assets.
Click here or the raw link below to explore the most comprehensive article ever written on exactly how Indexed Universal Life works as well as an in-depth examination of IUL’s pros and cons.
Click here or on the image below to schedule a custom consultation to match the best IUL product and company with your unique preferences and situation.
John “Hutch” Hutchinson ChFC®, CLU®, EA, AEP®, CExP®
(Click here for Hutch’s bio or click the different Acronyms above to see what each one means.)