IUL in Retirement
When properly designed, an indexed universal life insurance policy can have many benefits for you in retirement.
Since the cash value inside indexed universal life insurance grows tax-deferred, then again, if designed properly, funds can be pulled out as tax-free loans. These loans do not have to be repaid back as long as you’re still alive and as long as the policy remains in force. Instead, the death benefit is used to pay back the loan after you have passed away.
On top of tax deferral, you can borrow against your cash value and pay a zero capital gains tax. This means you can borrow for a new car, home, or for your children’s education. The choice to pay them back or not is completely yours.
Using an indexed universal life insurance policy in retirement can potentially be a safety net against rising taxes or market volatility. At the very least, a properly structured and funded product can give you additional options when it comes to accessing capital in retirement.
The risks associated with IUL in retirement can be summarized by considering the internal costs of the product you buy, the rate you are charged for an IUL loan, and the market performance.
IUL Fees: Indexed Universal Life Insurance products have costs associated with life insurance. This means that although the product may NOT have the investment fees typically associated with investments like mutual funds or variable annuities – IUL fees should be explored with the professional you are working with so you can better understand how your IUL may perform in retirement.
Cash Value Guarantees: Although guaranteed cash value is a standard feature in this type of product it is unlikely that the cash value of your IUL will have a substantial guaranteed growth rate. The growth of an IUL product is contingent on the performance of the index you have selected. If your index performs poorly your product may not generate the illustrated performance. The performance of an indexed universal life insurance product is market-dependent, and therefore the potential growth of your product may be less than illustrated.
IUL Loans: You may choose to access your cash value in retirement through a loan from your IUL. The attractiveness of an IUL Loan, like any loan, is dependent on the rate the loan will charge. This is important for IUL consumers to recognize because if your product charges you rather large rates in the future, this could impact the stability of your product, whether or not your product will perform as illustrated.
Always ask your financial professional about IUL fees, IUL loan rates and cash value accumulation prior to purchasing any IUL product.