A Tax Free Retirement


Doesn’t that sound dandy? Retiring with tax free dollars. Almost reads like a come-on from a certain East Coast based investment hustler.

My friends, as of this writing if you own the product I am about to explain, you have a tax free retirement vehicle second to none. How you grow it determines how much you’ll have at retirement.

I bring this to your attention because the new Obama administration is making a lot of noise about the 401ks, IRAs, SEPs and other pension funds you now own. They want to roll all of them into something called a GRA – government retirement account.

These newly elected politicians have the same thought theology that created the Department of Energy to free us from dependence on foreign oil (that’s working isn’t it?) and the Department of Education to make our kids smarter (our students rank in the top 80% of the world, right?). Oh, lest I forget, the war on drugs. That’s another marvelous program brought to you by the same intellectual thinkers.

Social Security Not Really A Worry

For everyone who is wondering if social security will be there for them when they retire, quit worrying. It isn’t there today. The government melded the SS funds into the general account so as to make the deficit look smaller than it really was. I’ll let you guess the name of the president who concocted that slight of hand.

By the way, you shouldn’t even have this particular worry – about this thing some call a government shell game -on your worry list because they are in the proverbial stuck position. If they tell the truth about the zero dollars in the kitty, the current crop of SS payers will revolt immediately if not sooner. And, those folks receiving the checks will start a panic unlike any seen in any country throughout recorded history. Basically, they have to keep up the charade and send out the checks. Hence, no worries.

Back to my tax free retirement. Today, maybe more than ever, people are looking for stock market alternatives, savings flexibility and something that can be used in addition to other plans. I think you probably are nodding your head in total agreement so I’ll move right into this little jewel.

I will skip over the IRS imposed limits on 401ks, IRAs, SEPs, etc since I am writing about an alternative to these plans. I will tell you upfront this strategy comes with associated costs and fees. If you are wise, you will ask about those costs when you start your search for the one that is right for you.


As I typed the above subtitle, the thought “tropical disease” popped into my head. I can assure you this product is not even a home grown disease.

EIUL is the acronym for equity-indexed universal life insurance. It is permanent life insurance offering all the benefits of universal life with accumulation values tied to a stock market index. It is like having had a put option on the housing market at the beginning of 2007 with an expiration date of December 2008.

An EIUL policy comes with two parts. One is a fixed interest rate component while the second part is an indexed account option. Don’t worry (pun intended), it gets easier as you read the rest of the story.

This creature called an EIUL has the ability to receive index-linked gains. In years in which the index does well, interest-crediting rates will rise, and in years in which the index performs poorly, interest crediting will fall but without a loss to your principal. Stated another way, when the linked index rises so does your cash accumulation. On the other hand when the index tanks, the capital tied to the index component doesn’t take a hit.

The policyowner is protected with minimum-guaranteed interest rates in case of stock-market losses. That’s why it won’t tank. If this sounds a lot like the current government bailout, well, what can I say…

The index used by most insurance companies is the S&P 500. Today as you probably know, it is tanking and tanking like a rock in water. Theory says if you bought one today, you should be in the cat bird’s seat because what goes down must go up.

What this means to you the policy holder is the potential to realize higher upside returns without a total crash on the downside. Therefore, it becomes a very unique and attractive cash-accumulation vehicle.

Tricks And Techniques

As with all investment vehicles there are tricks and techniques to building cash in a EIUL. I do not intend to explain each and everyone. However, I will tell you the technique of overfunding is popular with a lot of people who buy one. Couple that with selecting an interest strategy and you have one heck of an investment.

Since the IRS does not tax borrowed cash value dollars, I bet you can immediately deduce how you will take your tax free dollars at retirement. Fianlly, remember to keep the policy in force until death. This prevents the nasty tax bug from sneaking in the back door.

If this little expose has whetted your apetite for more knowledge, start by searching the Net for more information. Once you think it is right for you, call your insurance agent and ask every question you can think of before plunging head first into these unfamiliar waters.

None of this is meant as investment advice. It is merely a for your information explanation of a product that is gaining popularity as of this writing. If you are doing well in your real estate investments, this may be the perfect place to stash dollars for your “golden” years.

After all, you won’t stop needing money when you hit that life segment called retirement. It is almost impossible to not only outlive, but be taxed out of, your retirement set aside dollars if you have done well in real estate and kept your EIUL force fed to the maximum.

Something to thing about, right?

Photo Credit: *amelia*

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  1. While I commend you for bringing the importance of planning your tax situation during retirement to the forefront, you may want to consider the risks and potential penalties that come from EIUL investments.

  2. Lydia,

    Thank you for the risk and potential penalties reminder. As I mentioned in the post, anyone considering using this vehicle needs to do their research before using it. Truth is, no matter what you plan to use, you should do your research.

    Here’s another point nobody wants to talk about – the political thinking on various investments as being appropriate for the unwashed masses. I’ve been reading numerous articles by tenured professors on the retirement plans available to the working stiff and, to me, it is quite amazing they all seem to be in favor of a government retirement program for the people while their plans are to remain as is.

    Yes sir, do your research because it is a very important component of your retirement program.

  3. Britt,

    Hard to tell when our newly annointed king will act but here is a tidbit from an AP article about how fast Social Security is disappearing.

    They actually printed this sentence:

    “The trust funds- which exist in paper form in a filing cabinet in Parkersburg, W.Va.- are bonds that are backed by the government’s “full faith and credit” but not by any actual assets.”

    Given this is true, one can reasonably assume that the smoke and mirrors that is called Social Security applies to EVERY agency created by the USG.

    I bet you can figure out how all of this is relative, right?

  4. An interesting idea… I’ll definitely do some further research into this, taking into account potential risks and penalties.

    Aside from that, I wonder how long it will be before the Obama administration closes “the EIUL Loophole”?

  5. Tax Free Retirement – “This is the best book I have ever read in my nine years in the financial industry. Not only is the content right on the money, but it is a complete pleasure to read. Once you start, you won’t be able to put it down! By comparison, all other financial books are a bore.” – Carter Gray, Pacific Insurance Group, Seattle, WA. 206-906-9046 or Pacific Insurance Group http://www.pacinsgroup.com. Please contact Carter Gray for a personalized case design after you read the book.

  6. Robin White, CLU, ChFC on

    The tax-deferred nature of life insurance is not an “EIUL Loophole”. When “universal life” policies were developed back in the early 1980s, they unbundled the pricing, investment and life benefits that are unified in a whole life contract, creating a flexible premium adjustable life insurance product. One immediate innovation was the Single Premium UL, which allowed individuals to “invest” in a life insurance policy that maximized tax-deferred growth while minimizing life insurance protection.

    The Technical and Miscellaneous Revenue Act of 1988 (TAMRA) set concrete limits to premiums that could be paid in without destroying the tax deferment. Exceeding those limits creates a Modified Endowment Contract, which has much less advantageous taxation of cash values and loans.

    The new definition of tax-deferred life insurance that resulted from this reform has been in place for over 20 years. In making the reform, Congress recognized the social value of life insurance and determined to protect its fundamental character. How the underlying cash values are invested has little to do with this. As performance over the long term for any investment strategy cannot be guaranteed, bureaucrats proposing to tax EIUL as such would have to make prospective judgments that clearly cannot be supported. What would be a ‘gratuitously excessive’ rate of return? And how will we know that a particular financial vehicle will violate it? Given that there are in fact costs associated with the life insurance benefits–costs that have an impact on return–and that these benefits are real and socially useful, I don’t see this product being attacked.

    I do see the likelihood that the product could be lumped in with Variable products. Requiring that sellers be securities licensed is probable. And that would be a shame, because there is little understanding of this valuable concept among securities practitioners.

  7. Robin,

    Thank you for your clarity on the EIUL. I hope it reaches a wide audience. As for the politicians, one can never tell what they will do with the tax code to screw you and I while keeping their benefit package intact.

    A good example is the non-answer to the simple question of after you pass health care reform, are you leaving your current plan to join the government program?

    BTW, I live near the Mustang Ranch and can still remember when the government took over control and actually ran it as a business. If memory serves correct, they went out of business in 6 months. This begs the question, if they can’t even make a profit running a whore house, how are they gonna manage health care?

  8. I hear you, Tom. If you want to know what government-provided healthcare would be like, ask a Native American or a Veteran. It’s no wonder that Congressmen would not give up their cushy benefits for such a plan.

    But back to retirement planning. When searching on the keywords Tax-Free Retirement, I find only you and Patrick Kelly even talking about it. Can you give me your take on how a good life policy compares to the typical Roth IRA?

  9. Dear Tom,

    Your initial comments are on target, including your reference to the consequences of a policy lapsing. However, I highly recommend that you refrain from calling these loans tax-free. The are untaxed loans.

    Please read my article in the April 2009 issue of InsuranceNewsNet Magazine. This edition can be accessed from my website.

    Willard R. Brumbaugh, LUTCF

  10. Robin,

    My wife is a 100% service connected disabled vet so I can tell you a lot of stories, both good and bad, about VA health care. However, I’ll leave that for another time and place. As for the Indian health care system, our agency has several Native American clients. I always enjoy their health care stories. I’ll also leave that for another time and place.


    Untaxed loans is a clever way of saying tax free, at least to me. Since it is allowed in the code and is tax free, I guess I’ll still call the money tax free. BTW, congratulations on a nice article in the InsuranceNewsNet Magazine.

    Hopefully, you’ve read the controversial 26 CFR 1.861. It is the only section in the code that actually describes the four types of income that are taxable.

    That too is ripe for another place and time.

    I wish everyone a great and prosperous day.


  11. Jeff, there is NO scam, the loan is borrowed from your CV account. You cannot borrow more than what is there. Good news though, your CV continues to grow because it is collateral for the loan, NOT the loaned money. Second, you don’t have to pay it back. Must make sure there is some money there when you pass on to keep it tax free. Any amount will do. I recently set my 3 grand kids up with a $100,000 policy each. (age 9, 11, 13) Their Tax Free Retirement is in place.
    I hope they will have a picture of me above their fireplace mantle. lol

  12. If you look for “Uncommon Financial Wisdom”, there is somebody I have done business with that can explain in detail how these policies work and the right and wrong ways of dealing with them. Believe me, there is a right way to do this, and most insurance agents don’t know how.

    Another thing clearly explained to me: these policies will not make you wealthy. Instead, you need something else like a business or real estate to generate the wealth. But putting the fruits of your labors into an EIUL has better odds of leaving more money in your pocket when you reach retirement.

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