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Winter 2018  Volume 11, Number 4        

retirement plan notebook

Q&A: How to Add an Indexed Universal Life Policy to Your Retirement Portfolio

Life Insurance can be an important part of your retirement plan.

A life insurance policy that protects your family's assets after you pass away, but also provides cash while you're still alive might seem too good to be true — especially if it provides assets during your retirement years.

For many Americans, a fixed indexed universal life (IUL) policy is the answer.

First, before examining the details of an IUL, it helps to understand universal life insurance. Universal life insurance is permanent coverage that offers flexible premiums; a level or increasing death benefit; and a tax-deferred investment opportunity. The insured pays the premium as well as additional money to "overfund the policy" to build cash value. The cash value gains interest over time and may be borrowed from or used to subsidize the future cost of the life insurance policy.

A drawback of a universal life insurance policy is if you take out a loan and pass away before the amount is repaid, your death benefit will be reduced. Also, if you don't withdraw the savings portion of the policy before you die, the insurance company keeps the cash.

Q. How is an indexed universal life insurance policy different from a regular universal life insurance policy?

A. With an indexed universal life insurance policy, the holder ties the cash value to either a fixed account or to an equity index account, such as the S&P 500 or Nasdaq 100. Policyholders can choose to put funds into both types of accounts.

The benefits of tying cash value to an index are:

  • Possible double-digit annual growth without risk of market losses.
  • Tax-sheltered growth and tax-exempt distributions.
  • Access to equity without age restrictions.

The policy's cash value has the potential to earn indexed interest based on the annual return of an external index, but the cash value is not actually invested in the index. The value is locked in on the policy anniversary, and can never be lost due to market volatility. However, fees and charges may reduce the policy value.

Remember that an IUL policy is not designed as a guaranteed income source during retirement. Instead, it's a fund that's available to supplement other investments or savings vehicles.

Q. Who's a good candidate for an IUL?

A.The short answer is anyone looking for life insurance and an accessible source of cash safe from market volatility. Here are some criteria to see if you are a good fit:

  • Planning for retirement and wondering about the volatility of the market or massive tax hikes?
  • Want funds to use for long periods?
  • Concerned about leaving beneficiaries or a family business without funds if you can no longer work because of injury, illness or death?
  • Interested in adding tax-sheltered growth to their portfolio?
  • Want a flexible premium structure. Whole life insurance and term insurance have rigid premium schedules; if you miss a payment, the policy will lapse. With an IUL policy, as long as you have positive cash surrender value, no mandatory premiums will be due?

Q. How much does an IUL cost?

A. Talk to your brokers, since policy costs vary between carriers and rely on fees and charges. However, because these policies are not heavily managed, they are usually not very expensive.

And, once the policy is properly funded, an IUL policy provides the flexibility to pay premiums when you want and in the amount you choose for the life insurance coverage you need.

Q. Are there tax benefits to having an IUL?

A. An IUL policy provides you the opportunity for tax-deferred cash-value accumulation. This way you don't pay taxes on the interest the policy earns while it's accumulating, which adds up to more money in your account.

Plus, an IUL provides income-tax-free loans and withdrawals. Policies are not subject to age and income restrictions.

Q. I already have a 401(k) and stocks. How would an IUL policy help me during my retirement?

A. It's possible for stocks and mutual funds to lose up to half their value — which happened twice between 2000 and 2010. An IUL can be a safe place to park some of those funds. Also, building a sizable cash value in an IUL policy by your retirement could mean you take less money from an individual retirement account or 401(k) account.


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In this issue:

This Just In...

Keeping Up with Medicare Changes

Individual ACA Rates are Going Up, Up, Up — Here's Why

Q&A: How to Add an Indexed Universal Life Policy to Your Retirement Portfolio

The Surprising Penalties of Genetic Testing


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