IUL for Retirement - Indexed Universal Life Insurance offers Many Advantages over Time
Indexed Universal Life Insurance (IUL) used for retirement can reduce risk of investment loss while having the potential to enhance growth over time through duplifunding. Using certain uncapped index strategies now available in the marketplace, in the long run such policies (net of charges) have the potential to create double-digit returns while allowing participating loans at 6% or even less. This arbitrage, or leverage, is not available in a 401(k) retirement plan. Neither does a 401(k) offer any protection against investment loss. Most IUL policies - apart from ongoing expense charges - offer a zero to 2% floor on index returns.
Most retirement plans recommend becoming more and more conservative as you near retirement - hence the existence of target date funds. IUL has protection against loss, with more upside income potential nearing retirement.
So what about IUL vs. a 401k or IUL vs. a Roth IRA? Which is better? A traditional 401(k) provides a tax deduction on contributions, unless you have access to a Roth 401(k) alternative (a Roth IRA has lower annual contribution limits). Many retirees see an advantage to receiving a lifetime of tax-free retirement income distributions over the deductibility of those smaller 401(k) contributions while they were still at work. IUL for retirement works much like a Roth 401(k) for tax purposes.
If you are a high earner, in 2022 your maximum contribution to a 401(k) is $20,500 ($27,000 if you are over 50). IUL has no fixed upper limit to annual contributions (premiums). If you qualify, insurance companies often allow annual contribution limits well over $100,000. And unlike your 401(k), if you can't make the maximum contribution this year, you can come back at any time in the future and make it up. Again, with the 401(k), it's "use it or lose it" - no catch-up after the current year ends.
Many people might contribute more to a retirement plan if access to the fund prior to retirement were easier. With IUL, the policy's cash values are always available for participating loans up to nearly the full amount. While there is no set time to pay the funds back to the policy, special care must be given not to compromise the original long-term retirement goal of the policy through risking loss of funds in some outside project.
Looking to IUL as a good way to accumulate living benefits (cash values) requires time. You need 15 years or more for its growth potential to rival other accumulation methods. However, the 15 years can include your retirement years. Most importantly, IUL is life insurance. If you are not allowed time to see the living benefits come to full fruition, in addition to your cash value, IUL pays an additional death benefit should you die. Your 401(k) will pay nothing more than your account value to your survivors.
IUL performs better over time with ongoing policy management, available from our associated company, Plan Trackers, Inc.
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