Information on index universal life insurance for retirement
Suwanee, GA · Member since 2016 · 10 posts · 9 votes
Does anyone have any idea where to go to get set up with an IUL? Do you think using an IUL is a good part of a retirement strategy? Thank you for your input.
@Kevin Stearns Any permanent life insurance product is a great part of your retirement strategy: IUL or Whole Life. Anybody who fully understands how these products work know that "buy term and invest the difference" is a myth.
Make sure your IUL is overfunded. It needs to be funded right up to the MEC limit and solved for the lowest amount of death benefit for the premium you are paying. This will maximize your cash accumulation.
1. Historically, the returns on cash value have outperformed the "average" mutual fund. I'd be happy to share my research showing this.
2. Dollar for dollar, the cash value will provide 2-3 times the income in retirement than a 401k or IRA invested in traditional assets. And its tax-free.
But for real estate investors, the real magic is the fact that...
3. You can leverage your cash value to literally put your money to work in two places at one time. If your cash value is growing safely at ~7% and you can borrow against it at 4.4% (current rates), then anything you put that loan into that makes more than 4.4% is a return ON TOP OF the 7% your cash value is earning.
You'll need to find an insurance expert to make sure the policy is designed for the highest possible cash value and that it includes the ability to take a variable loan immediately. Not every product in the market allows for this.
This blog post explains the leverage strategy for real estate investors:
https://www.biggerpockets.com/blogs/7595/47651-are...
This blog post deals with all of the myths surrounding life insurance:
https://www.biggerpockets.com/blogs/7595/49878-are...
Good Luck!
Tom Rutkowsi
@Joe Splitrock- Wrong. Keep trying.
@Seth Glause - There are two ways to get access to the cash value in a life insurance policy. One is to "Withdraw" it. If you do that, it is treated just like an investment and any gains are taxable. The smart way to access the cash value is via a policy loan. Every state's insurance statutes mandate that insurance companies provide their policyholders with a loan secured by the cash value of the policy. Since you are getting a loan, you do not pay income tax on any gains.
What you really need to understand, and what makes this really work for real estate investors, is that the cash value in the policy is still there. And still earning interest or dividends. Yes, your loan is accruing interest, but it is being offset by the gain on the collateral. Either the insurance companies or the state regulators have provided this wonderful little loophole to give everyone tax-free access to the cash value of their policies.
Now if you treat this as a business decision, and use a policy loan to invest in real estate, then any project that returns more than your cost of money is providing a gain ON TOP OF WHAT THE CASH VALUE IS EARNING.
Too many of the people on this discussion are trying to compare life insurance AGAINST other investments. Its not an EITHER/OR decision. It BOTH. The math doesn't lie. You can make more using this leverage strategy than you would investing the cash directly in real estate. Why? Because your money is working in two places at one time.
@Henry J. - Yes there are caps and floors on the returns. There are many different choices of indices and different indexing strategies. Floors are usually Zero (principal protection). Caps vary by index and strategy. One year point to point on S&P500 is ~12.5% right now. Blended indices from some carriers are as high as 16-17%. The important thing is that they average 7-8% with no risk of loss due to the market. On a risk-adjusted basis, these are great returns.
You are not invested "in" the market in any of these strategies. I'd be happy to explain to you, but I'm not going to write a book here.
Yes, its very much like a Roth. Premium is paid with after-tax dollars and there is no limit on your contribution. Its better because of the leverage potential and the fact that it is self-completing. If you die before you reach retirement age, your family gets everything you were saving towards because of the death benefit.
Your concept of the $50,000 premium is fine except that the IRS has a formula mandating the minimum amount of insurance that $50K premium must purchase. What I do is work backwards from the premium to find the minimum amount of insurance death benefit the policy must have.
For me personally, my $50K premium leads to about $42K of cash value on day one. My policy is over $1M death benefit. I was in late 40's when I got it. So I have $42K of cash value AND $42K credit line all working for me. That will earn more than $50K invested into the same thing I put the $42K loan into (tax liens for me) . No twisting of numbers. Just plug your numbers into a spreadsheet. You'll see.
Thomas Rutkowski
You can keep preaching your UL, but I'll stick with my term insurance that's cheaper and my low expense vanguard IRA's that have averaged 11% and will be tax free at retirement.
Thomas, can you tell me why you don't think an index fund from Vanguard that has averaged 11% (low fees and tax free distributions) and a term life insurance (500k) that costs $20.00 a month is a bad thing?
I've explained the numbers to you several times. If you don't get it, I can't help you.
You and I can both put the same amount of money aside for savings. You can put it in your vanguard fund and I will put it into an IUL tracking the same exact index. Yours may accumulate to more by the time we reach retirement age, but mine will provide more income in retirement. I've explained over and over why this is and I think that is the part you are missing.
And I can leverage my retirement savings every day between now and the time I retire.
You state that "Yours will provide more income in retirement". Is that a gaurentee that you can provide to me in writing? There is risk in investing and that is something you need to provide in your calculations. Also what people need to be aware of are the following with UL
1. High Premiums - Term is always less expensive per month then UL.
2. Surrender fees -Insurers usually charge "surrender fees" for early cash withdrawals. The fee varies, with earlier withdrawals incurring higher fees. And when you take the accumulated cash out of your policy, the cash value is normally taxable income. Plus, you give up the death benefits on the policy once you take the cash.
3. Fluctuating interest rates -"Insurance providers often promote enticing interest rates on universal policies. The higher the rates, the more money your policy accrues over time. A common problem, though, is that interest rates fluctuate, according to a September 2011 CNNMoney article. For instance, your policy might start at a 4 percent rate but you find several years down the road that your plan is earning just 1 to 3 percent interest. This often would be a much lower return than you could have gotten with many other types of investments."
4. High fees and commissions - UL's are pushed heavily because they are well commissioned and the fees are high. Try getting an insurance agent to write up a Term life policy. They won't because there isn't the same compensation as there is with UL or WL.
You state that "Yours will provide more income in retirement". Is that a gaurentee that you can provide to me in writing?
IUL's track market indices. Both you and I are using "average" returns. Is there any Guarantee that you are going to get 11%? I haven't seen that rate of return in my life and I've been investing in vanguard index funds since I was 18. I'm 51 now. On a risk-adjusted basis, the IUL returns are vastly superior. Mine has principle protection. I'm not going to see the 35-40% market declines that you will.
There is risk in investing and that is something you need to provide in your calculations.
Both WL and UL products offer principle protection. Life insurance is not an "investment".
Also what people need to be aware of are the following with UL
1. High Premiums - Term is always less expensive per month then UL.
As a savings strategy as discussed in this topic. The "premium" is whatever the client decides he wants to put into it. If its $100 per month or $50,000 per year, the same relative amount of insurance cash value is received from each premium. That dollar of CV, even though it is reduced by fees and commissions, is capable of producing more income from that day forward. So again, it doesn't matter what I get paid and its not about "premium" amounts.
2. Surrender fees -Insurers usually charge "surrender fees" for early cash withdrawals. The fee varies, with earlier withdrawals incurring higher fees. And when you take the accumulated cash out of your policy, the cash value is normally taxable income. Plus, you give up the death benefits on the policy once you take the cash.
The policies I design for high early access to cash value have no surrender charges. This impacts my commissions negatively, but the client has access to 100% of their cash value from day 1. Nobody in their right mind would take a withdrawal from a policy when you can access the cash value via a policy loan tax free. And since the collateral is still growing, it is effectively a tax-free distribution mechanism. Absolute genius from whoever thought of it.
3. Fluctuating interest rates -"Insurance providers often promote enticing interest rates on universal policies. The higher the rates, the more money your policy accrues over time. A common problem, though, is that interest rates fluctuate, according to a September 2011 CNNMoney article. For instance, your policy might start at a 4 percent rate but you find several years down the road that your plan is earning just 1 to 3 percent interest. This often would be a much lower return than you could have gotten with many other types of investments."
Seriously, we are talking about IULs here, not UL. The returns are based on the underlying market index, not interest rates. UL's are a completely "unbundled" life insurance policy. They pay out whatever they are making in their general fund. Rates are highly dependent upon the general interest rate climate. If they are currently paying 4% when banks/CD etc., are effectively paying zero, I think we have seen the bottom. As interest rates rise again, so too will the interest rates that UL policies credit. The insurance company simply passes through what they make on their investments.
The insurance company is not trying to keep rates down. Why would they? As the cash value increases, THEIR RISK DECREASES. The better the growth on the CV, the quicker their risk exposure is eliminated.
4. High fees and commissions - UL's are pushed heavily because they are well commissioned and the fees are high. Try getting an insurance agent to write up a Term life policy. They won't because there isn't the same compensation as there is with UL or WL.
Don't paint me into a corner as being an IUL or UL guy. This topic was from someone asking specifically about IULs. All of the life insurance leverage strategies that I write and blog about work with any kind of permanent life insurance policy: whole life or Universal life. I'm not "pushing" anything. Either you get this or you don't You clearly don't get it and you are much more concerned about how much I am making even though you would be making more at the same time.
IUL and whole life hucksters are everywhere!
Plenty of good analysis out there why this usually is not a good idea. Want to diversify? open a vanguard account and buy low fee mutual funds.
What I like about IUL is the floor on losses and the liquidity. When there is a correction in the housing or stock markets, your capital is preserved and you have the liquidity to buy at a discount at the market low. Seems to be a good strategy if you want to take some chips off the table at the height of the market, but still earn a nice return while keeping your money safe and liquid. Can even borrow against the cash value and put money in something like tax liens when the market is at its height. I'm looking at the pros and cons now and considering it.
@Kevin Stearns My husband has an IUL which we find beneficial for the following reasons;
-He is a high W2 earner and wanted somewhere to invest money with no cap and tax free when we borrow from it in the future.
-We can borrower funds from the IUL to invest in more Real Estate once my husband leaves his high income job (Oil Production) to continue growing our RE empire.
-The death benefit is immediate and large which is important for us because his job is more high risk and in the next year he will become the sole income earner in our family (Besides REI income).