Wow! How time flies! Seems like just yesterday that the real world would open its doors and say here I am, come and get it. Well, age 35 in my opinion is still young. For those that have been slow to find their perfect fit in this land of opportunity, time is still on your side. Especially when it comes to planning for retirement. Read on to learn why an IUL at 35 may make sense for you! Indexed universal life insurance is a great product for building cash and then using that cash value buildup as an income stream at retirement.
When we take that first job right out of college in our 20s, we are usually talked into the company 401k plan and a few other benefits that our employer is offering. We begin to see the benefit to starting to save for retirement early. We listen to the perfect pitch from the retirement plan guy and jump in with both feet. After all, we don’t want to have to work until we are 65 or 70 likes our mothers and fathers had to. Yep, we jump right in and start contributing in the 401k plan that so many others around us are contributing into.
This is not a bad thing at all. And for the last 8 years the stock market has been on a roll. Our money has grown as expected and even more in some years. What you may not understand at age 35 is that your 401k plan can decrease in value depending on what happens in the market. You may not recall that in 2000 the dot.com market crash claimed roughly $8 trillion of investor funds. What a blow, especially if you were planning to retire soon after. Again, in 2008 we had the mortgage market meltdown where the average investor lost about 25% of their 401k value. Not to mention what the value of their homes and other investments lost. Many refer to 2000 to 2009 as the lost decade.
Let’s go back to 1997. This is the year that indexed universal life insurance, or IUL, was first introduced by Transamerica. Indexed universal life is a cash value life insurance policy that is credited interest based on certain market indexes such as the S&P 500, NASDAQ, DOW, EURO STOXX and HANG SENG.
So IUL policies are life insurance but they have investment-like features. IUL however, is not a security like a mutual fund or stock because the funds are not directly invested in the stock market. Best of all, your money only participates in the gains, not the losses.
The amount of gain is limited in the policy, currently at around 13%. This cap is a pretty good deal considering that the policy will never lose value in negative market years. So back in 2000 and 2008 when we saw some catastrophic losses in the markets, the IUL policy stayed the course and never lost any value.
IUL at 35: by the numbers
Many financial advisors today are touting IUL as the Roth IRA or 401k alternative. I think that a quick look at the numbers will make it easier to understand.
Let’s assume that we will pay $5500 per year into our IUL policy until retirement at age 65. I choose $5500 because that is the same contribution limit as an IRA or Roth IRA.
You personally may have a different number in mind that is much more or much less than $5500. We can work with you to show you a personalized quote. A super advantage that IUL has is that there is no contribution limits set by the IRS – you can put as much money as you want into the policy.
$5,500 a year amounts to $165,000 over a 30-year period. Well, assuming that your average return on the IUL policy was between 7% to 7.5%, you would be able to receive an income of about $60,000 per year until you are age 100. And that $60,000 a year comes to you income tax-free. If you were to be in a 25% tax bracket, you would need to withdraw $80,000 from your 401k or IRA to net $60,000.
An income of $60,000 per year for just 10 years would be $600,000 and 20 years would be $1,200,000. You only put in $165,000. The number just grows the longer that you live. I personally use IUL to save for my retirement and will depend on it to make up at least 50% of my retirement income.
I haven’t even mentioned the life insurance benefit. Chances are, you are in need of life insurance to help cover debt that you may have or income that you would want to replace for your family in the event of your death. Remember, this is a life insurance policy and the main purpose is supposedly life insurance. This particular policy has a death benefit of around $500,000 that would be paid tax-free to your family.
There are other benefits like chronic and critical illness benefits that are included in this policy and we discuss them in detail in other blog posts.
Fox Business states that it “looks like odds are good that indexed universal life may offer you roughly two to three times the amount of benefit over conventional investments, depending on the actual index returns and your tax bracket.”
The theme here is that 35 is a great time to start investing in your future retirement plans. We help our clients understand all of the benefits that IULs can provide. We can help you, too. To get a detailed proposal for yourself, just complete the quote request form to the left or call us at 1-800-712-8519 and someone will reach out to you.