What Are The Benefits of IUL Policies In Retirement
When properly structured, an indexed universal life insurance policy can have significant benefits for you in retirement.
Since the cash value inside indexed universal life insurance grows tax-deferred, and you can borrow against your cash value and pay a zero capital gains tax, IUL policies represent a great potential solution for many retirees. The benefits associated with tax-deferred growth and tax-free access to your cash value means you can use the funds for a new car, home, or your children’s education. Therefore, using an indexed universal life insurance policy in retirement can be a safety net against raising taxes or market volatility. At the very least, a properly structured and funded product provides you additional options when it comes to retirement income.
The risks associated with using indexed universal life insurance in retirement can be summarized by considering the internal costs of the product you buy. In short, the most common risk of using an IUL in retirement is the difference between the rate you are charged for an IUL loan compared to the performance of the index you select within your IUL policy. 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. This is a risk because the cost of any outstanding loan is paid for through the growth of the existing cash value or the cash value account itself.
Is IUL The Right Choice For You?
The Primary Risks of an IUL in Retirement:
IUL Fees:
Indexed Universal Life Insurance products have costs associated with life insurance. This means that although the product may NOT have fees typically associated with investments like mutual funds and are Significantly less expensive than variable annuities – IUL policies do have costs associated with the cost of insurance, along with certain administrative fees. If you consider buying an IUL, you should explore these fees with a highly-rated IUL expert to understand how your IUL may perform in retirement.
IUL Loans:
You may choose to access your cash value in retirement through a loan from your IUL. Like any loan, the attractiveness of an IUL Loan depends 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.
IUL Benefits in Retirement
Stability of Principal:
Your IUL policy cannot go down due to market performance. Principal stability is a huge benefit when a person is retired as there are innumerable circumstances where having access to a stable portfolio could be important.
Buffer Against Investment Risk:
Investors and retirement savers can use their IUL policy to offset the inherent risks in the stock market or other riskier investments. It is reasonable to assume this type of investment will outperform bonds and other guaranteed investments during stock market boom cycles. Still, it will likely underperform stocks or similar riskier assets during these times. However, during market declines, your IULs principal value is guaranteed not to decline due to negative stock market or index performance and is therefore almost certainly going to outperform stocks and could also outperform bonds when the market declines.
Tax Diversification
Future tax laws are unknowable, and tax rates have fluctuated wildly in the past. Having access to an investment that you can access tax-free is an enormous benefit in retirement. Withdrawals from your 401(k) or IRA are taxable, and your Social Security Benefits could be fully taxable, too, depending on your retirement income. As taxes are projected to rise in the future, your IUL can generate cash flow that isn’t impacted by taxes, allowing an investor to make proactive, intelligent decisions about which account to pull from in retirement.
Conclusion :
The major benefit of using an IUL in your retirement planning is the benefit of choice. IUL owners enter retirement with an additional asset that is guaranteed not to lose value in down markets and could significantly outperform other investments with similar risk profiles. Using an IUL for retirement planning also offers the owner of the IUL the ability to select which account to pull their necessary retirement income from, lessening your tax burden in the future.
