Retirement planning is challenging, especially when you move from the accumulation phase into the disbursement phase of your life, where you need to generate a steady income stream to support your lifestyle.
With the rising cost of living, having a sound retirement plan is essential to help you achieve your financial goals. If you are already maxing out your qualified retirement plans and want to save even more, consider supplementing your retirement with a cash value life insurance policy.
One type of plan is called Indexed Universal Life Insurance (IUL), which offers life insurance coverage and the ability to accumulate interest tied to the movement of stock market indices. This can enhance your retirement income and protect your family in the event of your death.
This article is written as general education, and should not be considered as personal financial advice. If you would like personal guidance with life insurance, you can schedule a time to talk with one of our experts.
Understanding Indexed Universal Life Insurance
Index Universal Life Insurance is a type of permanent life insurance that offers a death benefit to the beneficiaries upon the insured person's death. The policy also offers a cash value component that can be used to accumulate wealth over time.
The policy's cash value component is linked to a stock market index (e.g. S&P 500, NASDAQ, Hang Seng, FTSE etc.) which means that the policyholder can earn returns based, in part, on the index’s performance, with a floor to limit losses and sometimes (but not always) a ceiling to limit gains. IUL does not offer direct investment in any stock mark
How IUL Can Help Enhance Retirement Income
IUL offers several benefits that can help enhance retirement income. Here are some of them:
1. Tax-Advantaged Accumulation of Wealth
One of the significant benefits of IUL is that the policy's cash value component's tax advantaged growth and access.
Like a Roth IRA or 401(k) retirement plan, IUL plans are generally funded with post-tax income, which allows them to grow tax free and provide tax-preferred distributions, when properly designed.
This means that the policyholder does not have to pay taxes on the growth of their cash value, as it grows.
If income is properly accessed from the policy, it can also be accessed without paying taxes while the insured is living.
This tax advantaged accumulation of wealth can help policyholders save considerable money in taxes, which can be used to enhance their retirement income.
Additionally, IUL plans features less limitations than traditional Roth plans, and while Roth plans generally feature limitations on yearly deposit amount, max income to qualify for eligibility, and age restrictions on distributions, indexed universal life does not feature these guarantees, which makes it more flexible.
2. Guaranteed Minimum Interest Rate
Some IUL policies may offer a guaranteed minimum interest rate even if associated market growth is poor.
This feature provides a level of security for policyholders, which can help them plan their retirement more effectively.
With this downside protection, policyholders are able to enjoy growth correlated to stock market indices, without sharing in the losses of these markets, which may provide for more stable returns over time.
3. Flexibility in Premium Payments
IUL policies offer flexibility in premium payments, which means that policyholders can choose how much they want to pay into their policy - within reason.
This feature can be beneficial for those who are already maximizing all of their qualified retirement accounts, and want to put even more money away for retirement.
It is especially beneficial for those with an income that may vary over time, since it allows them to put more money into the plan when their cash flow is greater and less when it is lower.
While there are limits to how much money you may be able to put into a life insurance policy, those limits are determined by the face amount (death benefit) of the contract and aren't technically limited, as long as the death benefit is reasonable considering the financial situation of the policyholder.
4. Ability to Access the Cash Value as Supplemental Income
Another benefit of IUL is that policyholders can take withdrawals and loans from and against the accumulated cash value, providing either lump sums of money or continuous retirement income.
When designing a life insurance policy as a supplement to a retirement, most advisors will show projections (an illustration), assuming the FIFO (first in, first out )principle.
This means that when it comes time to take money out from your policy you would first get a redemption equal to the premiums you have paid into the policy (known as a cost basis) through a withdrawal of the cash value.
In a properly designed policy, taking back this money is not considered a taxable event because you are not withdrawing any profits.
Withdrawals may or may not reduce the face amount (or death benefit).
If you want to access additional cash after you have gotten back the amount you put in, most advisors would structure these distributions as policy loans.
This method is popular because, if you were to withdraw more than you paid into the policy, this would create a taxable event where the withdrawals would usually be taxable as ordinary income.
Loans from life insurance policies are generally tax deferred, as long as it has been properly funded and stays inforce.
Loans on life insurance policies are unique in the sense that if they aren't repaid prior to the death of the insured, they will be paid back using a portion of the death benefit, at time of death.
Most loans on IUL policies work like this:
First, the loan is taken out of the cash value of the policy, which generally will no longer earn interest through the indexed account it was previously allocated to.
Instead, the cash value which is securing the loan is set aside in a separate account which typically has a guaranteed interest rate.
When this cash value securing the loan generates interest, it accumulates and may even go back into the index account.
The loan will usually reduce the face amount (death benefit) and will continue to reduce the death benefit as loan interest increases the loan balance.
Life insurance loans usually come with options for both fixed and variable interest rates.
The insurance company has contractual interest due (sometimes upfront, sometimes in arrears); if the interest is not paid out of pocket by the owner (or anyone) then the existing loan may grow by the unpaid interest amount and compound.
If the insured dies with an outstanding loan the death benefit pays the loan first and then the remaining death benefit would be paid to the beneficiaries.
This feature can be useful for those who need to supplement their retirement income or have unexpected expenses.
5. Guaranteed Death Benefit
IUL policies may also offer a guaranteed death benefit, meaning that the beneficiaries may be guaranteed to receive a payout upon the insured demise. The period for which the death benefit is guaranteed can range from 10 years through the lifetime of the insured and may be subject to certain conditions.
This payout can provide the beneficiaries income or pay off any outstanding debts. This can help provide financial security to either loved ones or business partners.
Please note that guarantees may be voided by taking withdrawals or loans from the policy.
Indexed Universal Life Insurance can be an excellent tool for enhancing supplementary retirement income.
With its tax-deferred accumulation, flexibility in premium payments, ability to access money from the cash value, IUL can help policyholders achieve their financial goals. The additional options of utilizing an account with a guaranteed minimum interest rate as well as the availability of guaranteed death benefit riders only further expands IUL's capabilities.
If you are considering IUL as a supplement for your retirement plan, you can easily request a personal plan through our digital brokerage platform for life insurance solutions.
If you'd prefer to talk to one of our industry experts to get personal assistance with an IUL plan, you can schedule a call through this link.