Individuals looking for a flexible, tax-advantaged retirement savings strategy may want to consider an Indexed Universal Life (IUL) insurance policy. 

An IUL is a type of permanent life insurance that offers a death benefit along with a cash value component that earns interest based on the performance of a stock market index with downside protection and upside potential.

The cash value can be accessed in a tax-advantaged way, making it an attractive option for those looking to supplement their retirement income. 

In this guide, we will explore how to use an IUL as a tax-advantaged retirement savings strategy and the benefits it can offer.

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.

What Are The Indexed Universal Life Insurance Tax-Advantages?

There are several tax-advantages associated with IUL policies that make them a popular retirement savings option:

1. Tax-Advantaged Withdrawals

The cash value component of an IUL policy can be withdrawn as on first in first out basis (FIFO), assuming that the policy has not been classified as a MEC (learn more in this article). 

This means that you can access their cash value through a withdrawal, removing premiums paid first without having to pay ordinary federal income taxes on withdrawals up to the cost basis. 

After the cost basis has been withdrawn, any gains that are withdrawn would be taxable as ordinary federal income. 

2. Tax-Advantage Loans

IUL policies also allow policyowners to borrow against the cash value of their policy on a tax deferred basis, assuming that the policy has not been classified as a MEC (learn more in this article). 

The loan is considered as a loan against the death benefit, rather than a withdrawal, which means it does not trigger any taxable events unless the policy lapses or is surrendered/canceled.

This means that loans can generally be used to access gains beyond the tax basis of the policy, without incurring personal income taxes. 

If the insured passes away with an outstanding loan, the outstanding loan and any accrued interest reduces the death benefit.

3. Tax-Advantaged Death Benefit

The death benefit paid out to beneficiaries is also free from ordinary federal income tax if there is a properly structured ownership and beneficiary arrangement (which you can learn more in this article). 

This can provide a valuable source of money to loved ones or your business in the event of the insured’s death.

4. Self Completing Plan

There usually is no death benefit on traditional retirement accounts like 401(k)s and IRAs, which means that if you pass away, your beneficiaries would receive only the balance in these traditional accounts.  

Using IUL as a retirement plan means that if you pass away, your family would a death benefit that could be much greater than any accumulated cash value. 

This self completing feature ensures that retirement goals are met even if the insured person does not make it to retirement. 

5. No Contribution Limits

Unlike traditional retirement accounts like 401(k)s and IRAs, IUL policies do not have income or contribution limits. 

The limits to how much insurance you may purchase or how much money you can pay in premiums on an IUL policy are determined by the owner’s budget and net worth along with the policy’s death benefit. 

This means that you can usually contribute as much as they want to their policy, making it a flexible option for those who may have maxed out their traditional retirement accounts and are looking to save additional money for retirement.

6. Tax-Deferred Growth 

The cash value component of an IUL policy grows tax-deferred. This means that you do not have to pay taxes on the interest earned inside the policy as long as the policy stays inforce and is not a MEC (learn more in this article). 

If the policy was to lapse or be canceled the owner may have taxes due on any monies earned above cost basis.

7. Flexibility in Premium Payments

IUL policies offer flexibility in premium payments, allowing policyholders to adjust their contributions according to their financial situations at any time. 

8. Control Over Investments

IUL policies allow policyholders to have control over where their cash value is invested. They can choose from whatever investment options their IUL policy provides.

Most IUL policies offer some type of fixed account that has a guaranteed interest rate and at least one account that follows an index (e.g. S&P500) with a floor for returns providing downside protection.  

Some carriers offer with a wider selection of accounts, including accounts with exposure to international indexes such as Hang Seng or EUROSTOXX, or so called managed volatility indexes, which uses active investment strategies to decrease volatility.

9. Emergency/Opportunity Fund

Policyholders can borrow or take fund withdrawals against the cash value of their IUL policy without having to go through a credit check or approval process. 

If done correctly, cash value can be accessed at any age, for any reason, without incurring personal income taxes on the money accessed.

This can provide a valuable source of liquidity as a rainy day fund for potential future cash shortcomings.

Additionally, it can provide financing for opportunities you might be planning for, such as starting a business or investing in real estate.

10. Optional Riders

IUL policies offer a range of optional riders, including long-term care/chronic illness riders, disability riders, and critical illness riders. 

These riders can provide additional protection and benefits to policyholders and their loved ones and are usually not available on traditional retirement accounts.

Who Benefits Most?

Those who benefit most from an IUL policy are those who need a death benefit to protect their loved ones and who have already maxed out their contributions to traditional retirement accounts and are looking for a way to save additional funds for retirement. 

Policyowners should expect that using life insurance to supplement their retirement is a long term strategy and generally should not plan on using the money for 10-15 years or longer. 

Additionally, IUL policies can be beneficial for those who are worried about market volatility and want a way to participate in market gains with downside protection against market losses.

Fees 

It's important to note that IUL policies come with fees and charges. Life insurance is usually front-end loaded, meaning the expenses in the early years of the policy are typically higher.

This is however not the case with Lincoln Financial’s IUL - WealthAccelerate, which doesn’t front-load fees and can go from application to issuance in as little as one day.

Lincoln has partnered with White Swan to offer this IUL through a simple digital experience which helps you make a more informed decision, while allowing you to compare different IUL options available in the market. 

To see what an IUL would look like for you, you can request a personal plan today. 

In general, the fees and charges on a life insurance policy are in part determined by the underwriting category of the insured and face amount selected by the policyowner. 

If an insured has an underwriting issue (e.g. health, age, avocation, occupation, financial etc.) this may cause fees and charges to be higher than for a healthy individual. 

If you do have an underwriting issue it is important to find a carrier that prefers your risk to reduce any additional fees you may be charged. 

Our digital broker features policies from more than 25 top carriers, and our experienced industry experts can help you find a suitable carrier for your needs.  

The face amount (initial death benefit) chosen by the policyowner will be one of the most important factor affecting fees and charges. 

There are two notable exceptions to this: 

• One is found in face amount banding. Face amount banding is the idea that buying life insurance with larger face amounts drives down the cost of the insurance per every $1000 of face amount.   

• The other exception is in minimum face amounts. Many carriers will not allow smaller face amounts or minimum face amounts to have their best underwriting category, which may only be available for higher face amounts.  

Many people falsely believe that an indexed account can not lose principal. Placing money in an indexed account that has a guaranteed floor of zero could still lose value if the account has a fee, which some accounts do. 

If you are interested in reading more about IUL check out Indexed Universal Life Insurance (IUL)—Its Key Benefits.

Conclusion

An IUL can be an excellent tax-advantaged retirement savings strategy that provides a host of benefits for policyowners. 

Utilizing an IUL, individuals can enjoy tax-advantaged growth on their contributions with downside protection and upside potential tied to indexes. 

If properly done, the cash value can be accessed at any age, for any reason, without taxes or penalties, including as retirement income.

IUL brings these benefits while also providing the peace of mind that comes with knowing that the death benefit would protect loved ones and provide a self-complementing retirement plan in the event of an untimely passing. 

With the right approach, an IUL can be an effective tool for building a secure financial future and enjoying a tax-advantaged retirement.

White Swan is a digital broker that provides access to the universe of life insurance solutions, and can help you build tax-advantaged wealth and keep your loved ones or business protected.

Our streamlined platform makes it simple, transparent, and quick to get the optimal policy for your needs and circumstances, straight from one of America’s top carriers.

To get started you can request a personal plan online or schedule a call with one of our industry experts.

‍