View INSTANT Quotes

Tax-Free Retirement using IUL

tax-free retirement
Insurance Quotes 2 Day Team

Written By Doug Mitchell

Doug Mitchell, CLU holds a BA degree in Finance from Auburn University as well as having obtained a Chartered Life Underwriter (CLU) designation from The American College in Bryn Mahr, PA.  Doug has spent close to 30 years in the insurance and financial planning industry and has held licenses to sell securities, long-term care insurance, health.  Doug is also a financial blogger addressing the topics of life insurance, annuities and retirement income planning.

Holly Mitchell  &

Holly Mitchell’s background in life insurance insurance goes back to 1985 when she worked for her father who was a New York Life agent. Holly has a marketing degree from Auburn University and has had a life insurance license since 2008. In addition to advising life insurance for customers all around the country, Holly is our website fact checker.

Rob Pinner   &

Rob Pinner is the founder and CEO of Pinner Financial Services servicing all 50 states. Rob started his insurance career in 2002.

Louis LaBash

Results-driven and innovative life insurance professional with 30 plus years of life insurance industry sales and marketing experience. Recognized as a pioneer in the field, leveraging phone and internet channels to exceed personal sales of over $100 million during the first decade of the 21st century. Creator of a highly effective intuitive IUL life insurance sales software that facilitated the sale of millions of dollars of indexed universal policies by numerous life insurance agents. Proven track record as a Managing General Agent (MGA), Life Agent, IUL Life Insurance Sales Software developer, and leading-edge creator of insurance marketing tools, educational content, and delivery systems.

 12 minute read

Tax-Free Retirement and the Role of Indexed Universal Life (IUL)

When I think about retirement, I often picture calm, relaxing days ahead. However, when I think about the financial side of retirement, taxes can present real challenges. That’s where Indexed Universal Life (IUL) insurance comes in. It’s more than just a life insurance policy; it’s a key player in tax-free retirement planning. With IUL, you can protect your family’s future while building a tax-free retirement income for your retirement years.

In our article, we will take a closer look at IUL. We’ll show you how it can work in your financial strategy and provide a tax-free income stream.

So, let’s dig in and discover the advantages and disadvantages of using an IUL policy for retirement planning.

According to the Life Insurance and Marketing Research Association (LIMRA), over 25% of all life insurance purchased in 2023 has been indexed universal life. The trend for 2024 remains the same.   

Where would you be financially if you followed Warren Buffet’s rules of investing and never lose money?

Rule No.1 is never lose money.

Rule No.2 is never forget Rule No. 1

Warren Buffett Forbes







How much money would you have saved by now? How much sooner could you retire?   IUL has been around for almost 30 years. Now, we have over 40 companies that offer IUL. Policies continue to evolve and get better each year.  IUL policies do not lose money, which is rule number 1.


Tax-Free Retirement Education

So here is where the education begins about IUL. Let’s pull back the curtain and educate you on how indexed universal life insurance is used as a retirement savings tool. And no, IUL is not tax deductible.

Let’s begin with an important question:

Would you rather pay taxes on the seed or the harvest?

Our goal with using IUL is for the following:

  1. Eliminate income tax on retirement income
  2. Increase Retirement Income
  3. Reduce Investment Risk
  4. Hedge against inflation


Key Benefits to Using IUL for Tax-Free Retirement

Growth Linked to Market Indexes: One of the standout features of IUL is its cash value growth, which is tied to stock market indexes. Unlike traditional retirement plans, this link offers the potential for significant growth, mirroring the market’s positive gains while protecting during bear markets.

Tax-Free Withdrawals and Loans: IUL policies shine in their ability to offer tax-free access to your funds. Whether you’re making withdrawals or taking out loans against the policy’s cash value, the money you receive isn’t subject to income tax. This is a clear advantage over other retirement savings vehicles.

Tax-Free Retirement Compared to Traditional Retirement Plans: When compared to traditional retirement savings options, IUL holds its unique advantages. Traditional retirement plans often have contribution limits, early withdrawal penalties, and mandatory distribution rules. In contrast, IUL policies can offer greater flexibility and control, with no contribution limits, no early withdrawal penalties, and no required minimum distributions.

An IUL policy becomes a powerful instrument in your tax-free retirement strategy, offering both growth potential and financial flexibility unmatched by many traditional retirement plans.

What is Tax-Free Retirement?

  • Tax-Free Retirement Planning is a strategy: IUL is a unique form of life insurance that not only offers a death benefit but also serves as a tool for tax-advantaged retirement planning.
  • Growth Linked to Market Indexes: The cash value in an IUL policy can increase based on the performance of selected stock market indexes, offering cash value growth to be used for tax-free retirement.
  • Tax-Free Death Benefit for Beneficiaries: When you die, IUL pays your family a lump sum that is generally tax-free, ensuring financial security.
  • Living Benefits for Critical Illnesses: IUL policies can include features that allow you to access funds in case of critical health issues, such as a heart attack, stroke, or cancer, providing financial relief when you need it most.
  • Support for Long-Term Care Expenses: IUL can also be a financial resource for covering long-term care expenses, offering peace of mind and financial support in later stages of life.


Building a Tax-Free Retirement Video

YouTube video

Indexed universal life insurance (IUL) is considered a permanent life insurance policy as opposed to term life insurance, which is temporary. IUL is considered permanent because it is meant to remain in force until the day you die.

If you design your policy correctly, IUL will do just that.

The premiums paid into Index Universal Life Insurance earn interest based on stock market indexes and grow the cash value within the policy. This bucket of cash can be used for anything you choose whenever you choose to use it.

Maybe you are looking to build up a college savings fund for the kids or grandkids, finance your major purchases, or begin your retirement.

We are going to focus on the tax-free retirement strategy in this article.

The cash value in Indexed Universal Life insurance can be accessed through withdrawals or tax-free policy loans (recommended).

Tax-free loans or tax-free income are what has caused IUL to achieve outstanding growth over the last couple of decades.

Imagine getting a paycheck each month at retirement and not having to pay any income taxes.

The potential interest earnings in these policies are currently around 9% to 10%, but we will use more conservative rates like 6% in our examples.

Even more amazing is that you can’t lose money in your policy if the stock market loses money. This policy is not a security and is not invested directly in the stock market. It’s like earning from the market without being in the market.


Tax-Free Retirement Plan Growth vs. S&P Index


tax-free retirement when using IUL


Even though we can enjoy stock market-like returns with IUL, our retirement money is never at risk.

Remember Buffet’s rule # 1?  Never lose money.

So, the worst-case return in a year is 0%.  If the index you have chosen in your policy is negative, you get 0% – no return for that policy year.  That is a pretty good deal.

Especially considering we have had 20 bear markets since the stock market crash of 1929.

The most recent crashes were in 2000, 2008, and 2022.

It is hard to say when the next bear market will be, but we do know that history repeats itself.  Bear market years are not so good for investors, especially if they are planning to retire soon thereafter.

Indexed universal life insurance = life insurance + higher than average interest credits + income.

Although IUL is life insurance, most policyholders use it to accumulate wealth to fund retirement with tax-free income later.


Examples of Tax-Free Retirement Planning

Meet Peter, a typical candidate for IUL.  Peter is married and works as an attorney. He is 35 and wants to retire at 65, like most of us.  Let’s assume Peter is willing to fund his IUL or indexed universal life insurance policy with $12,000 per year ($1,000 per month) until his planned retirement age of 65.

Here is what Peter can expect in terms of tax-free income from age 66 to age 100 based on 6% interest rate projections:

Sample Tax-Free Retirement Plan for a 35 year old male

North AmericanAllianzNational Life
Contribution Amount$2000 per month$2000 per month$2000 per month
Starting Death Benefit$1,000,000$1,000,000$1,000,000
Death Benefit at age 65$3,240,000$2,915,000$2,785,000
Cash Accumulation value at age 65$2,240,000$1,915,000$1,785,000
Annual Tax-Free Income at age 65$259,000$166,860$158,000
IRR at age 658.25%8.14%7.31%
Illustrated Rate based on historical returns6.24%6%5.73%
The table above assumes that $2,000 per month is contributed to age 65 then taking monthly income from age 66 to age 100 using around 6% interest rate projections.


In this scenario, Peter’s commitment to invest $1,000 per month in his retirement would deliver a substantial tax-free income stream beginning at age 65: >His death benefit would have increased from $453,649 to $1,358,010 (this amount available for long term care) >His cash accumulation would have increased to $904,361 >He would begin receiving an annual tax-free income of $91,788. All with no stock market risk.


If, however, Peter’s retirement plan is delayed by 10 years and his contributions start at age 45 rather than 35, his expectations would be reduced as follows:

Sample Tax-Free Retirement Plan for a 45 year old male

North AmericanAllianzNational Life
Contribution Amount$2000 per month$2000 per month$2000 per month
Starting Death Benefit$600,000$600,000$600,000
Death Benefit at age 65$1,534,000$1,422,000$1,416,000
Cash Accumulation value at age 65$934,000$822,000$816,000
Annual Tax-Free Income at age 65$107,000$72,000$68,000
IRR at age 659.58%9.05%8.63%
Illustrated Rate based on historical returns6.24%6%5.73%
The table above assumes that $2,000 per month is contributed to age 65 then taking monthly income from age 66 to age 100 using around 6% interest rate projections.
Certainly, timing is everything, although it’s never too late to save and invest for the future. Starting an investment plan at 45 rather than 35 reduced Peter’s wealth accumulation as follows: >at age 65 the death benefit is reduced to $693,968 >the annual tax-free income is reduced to $39,120

Peter might want to start off contributing more to his IUL to increase his benefits.

Finally, if Peter started his retirement planning at age 55 (as many people do) or decided to implement a tax-free retirement strategy to supplement a 401(k) or IRA, Peter would still realize a substantial benefit:

Sample Tax-Free Retirement Plan for a 55 year old

North AmericanAllianzNational Life
Monthly Contribution$2000 per month$2000 per month$2000 per month
Starting Death Benefit$400,000$400,000$400,000
Death Benefit at age 65$691,000$661,000$684,000
Cash Accumulation value at age 65$291,000$261,000$284,000
Annual Tax-Free Income at age 65$31,000$22,000$21,000
IRR at age 6514.36%15.25%15.29%
Illustrated Rate based on historical returns6.24%6%5.73%
The table above assumes that $2,000 per month is contributed to age 65 then taking monthly income from age 66 to age 100 using around 6% interest rate projections.
Even after getting a late start in life, Peter’s IUL would still deliver a substantial benefit to his retirement plan with: >A death benefit at age 65 of $327,751 >An annual tax-free income stream of $11,424

Another feature of indexed universal life insurance is that you are never limited to what amount you can contribute, like in a 401k,  IRA, or ROTH IRA. I get the question of how much money I should put in my IUL all the time.

We see contributions anywhere from $2000 per year to over $100,000 per year. The IUL policy can work for all sizes of contributions as long as you design your plan correctly.

Your plan should be based on your goals and your budget.

We recommend having more than one retirement savings bucket and not depending solely on an IUL.

Why does the IUL Policy work so Well?

A properly working IUL begins with design.  We will get to that.

We want to buy as little life insurance as possible with your contribution, allowing most of your premium to go towards savings that will accumulate tax-deferred.

So again, what is indexed universal life insurance?  IUL is a life insurance policy designed to maximize the cash value to generate a lifetime tax-free income stream when you are ready to quit working and enjoy life.

Our clients come in all financial shapes and sizes.  Whether you are looking to save $200 per month or $20,000 per month, Indexed Universal Life insurance deserves serious consideration.

Not every type of permanent life insurance policy will allow you to withdraw or take policy loans against the cash value.

An indexed universal life policy allows for cash withdrawals or tax-free loans, but what, if any, are the tax ramifications?

The tax treatment of the IUL cash value is what makes it such a powerful investment tool.

Loans against your policy are tax-free and do not have to be repaid.

The loans are paid back to the company when you die through the death benefit of your policy.  Withdrawals, on the other hand, are tax-free up to the basis of your policy.

That means you can take out all of your contributions tax-free, and then you are taxed when you pull out the interest earned.

This is why we suggest using the loan feature in your policy. When you take loans against your policy, you generally have three options.

  • Variable or Indexed loans
  • Fixed or Wash loans
  • Fixed participating loans

When you take a variable or indexed loan, your money inside the policy still earns interest based on the stock index chosen.  For example, you borrow against your policy at 4% interest, but the cash value in your policy is credited at 6%.

You earned 2% more interest than you paid.  But remember, the loans and interest do not need to be paid back.

When you take a fixed or wash loan, money is moved from the indexed account into the fixed account.  For example, you borrow against your policy at 3%, but your money grows at 3%.  Some companies also refer to this as a zero-cost or wash loan.

Designing your IUL for Tax-Free Retirement

For an IUL policy to work properly and provide you with the most tax-free income, you need to follow three very important rules.

  1. Structure the IUL properly by purchasing the smallest of life insurance possible using IRS guidelines.  This is a calculation that needs to be done by a qualified advisor.  We can run these numbers for you.
  1. Fund the policy with the maximum premium but keep it from becoming a (MEC) modified endowment contract.  Our calculation process does this automatically.  We recommend funding your policy using the guideline premium test.
  1. By knowing your goals and timeline, we can develop a contribution schedule that allows for the most premium going into your policy.  This may be a short pay where we get all the funds into your policy over five years or maybe a plan that you make consistent premium contributions until you are ready to take your tax-free income stream.

If you can follow these simple rules, your IUL policy can become a wealth-building machine rather than just a regular life insurance policy.   The IUL can outperform traditional retirement products because of five important reasons.

  1. There is no contribution limit mandated by the federal government.
  2. There are no penalties for early withdrawals.
  3. There are no required minimum distribution rules.
  4. Since you are taking income through policy loans, there is no tax liability on that income stream.
  5. And, since the income stream from your IUL is taken as a loan and is not considered income, it will not interfere with your social security income.


What about the Pros and Cons of Tax-Free Retirement Plans?


  1. Tax Savings: Contributions grow tax-free, and loans and withdrawals during retirement are also tax-free, providing significant tax savings over time.
  2. Compound Growth: The compounding of tax-deferred contributions and earnings leads to higher cash value growth.
  3. Financial Flexibility: Tax-free retirement plans often provide more flexibility regarding withdrawal options and investment choices.
  4. Estate Planning Benefits: These plans can be advantageous for estate planning, as they may offer tax-free inheritance options for beneficiaries.


  1. Lack of Upfront Tax Breaks: Unlike traditional retirement plans, tax-free plans do not provide tax deductions for contributions.
  2. Investment Restrictions: Some tax-free retirement plans may limit the types of investments you can make, potentially limiting growth opportunities.
  3. Penalties for Early Withdrawal: Withdrawing funds during the surrender charge period, usually 10 or 12 years, can result in penalties, reducing the tax-free income of the plan.


Ed Slott, considered one of America’s most respected IRA experts, discusses in this short video how IUL tax advantages can offer tremendous benefits to the policyholder:

YouTube video

Indices that Your IUL Can be Linked To

The IUL is set up to allow the policyholder to invest a periodic premium into the policy. A portion goes toward the cost of life insurance. The balance is deposited in a cash account that earns interest based on the index selected.

Although the options available depend on the insurer and the product, the more traditional index options available are:

  • The S&P 500
  • The Dow Jones Industrial Average
  • The NASDAQ 100
  • The Russell 2000 Index

It’s important to note that the cash in your IUL cash value is not directly invested in these various indices; rather, the account is linked to the performance of the indices you choose to link to.

You will likely see more index options coming soon.

With many policies, you can choose to allocate premiums to the indices listed above in any combination, or you can choose to allocate to the fixed account. The fixed account generally pays interest at around 2% to 4%. This amount will fluctuate, but most policies will guarantee around 2.5%.

The index credit is added to your cash value on the index crediting date, normally the business day that falls on or immediately after the index period’s end date.

The policy will typically have a floor rate (minimum guaranteed), interest credit, participation rate (the amount of earnings the company will credit to the cash account), and a cap rate that limits the amount of earnings that will be credited during the index period in your IUL policy.

Not all IULs are created equal.  Some are designed with strong cash value accumulation features, and others are designed with death benefit and long-term care features.

Our job is to help guide you to the IUL that will help you meet your goals.


You are in Control of Your Tax-Free Retirement Plan

Indexed universal life insurance allows the policy owner to remain in control. Yes, this is life insurance, but it certainly has some of the characteristics of an investment. You can access your cash at any time and for any reason without the tax consequences that most other investment products have.

There is no limit on the amount you can contribute to your indexed UL as long as it is set up properly initially.  If you need to, you can suspend payments for a period of time. You can change your death benefit, premium amount, and payment frequency. How flexible is that?

An IUL can be perfect for a healthy, high-income earner.  Once you have met your contribution limits for your 401k, IRA, or SEP, your investment options are limited.

High earners who have become frustrated with other inflexible traditional investment products that are heavily regulated and high-risk are perfect candidates for tax-free retirement planning. The IRS does not allow you to roll over existing retirement plans into your indexed universal life insurance policy.  Instead, many today are converting portions of IRAs and 401ks to Roth IRAs or IUL.  A ROTH IRA conversion or IRA to IUL conversion can help save thousands in taxes.

How we can help

Currently, there are over 40 companies that you can use for your tax-free retirement plan.  We have a handful that we recommend. We design your policy in the best way so that you have the lowest expenses and the best opportunity to grow your cash.

When you buy your Indexed universal life policy, you must find the best IUL company that delivers the best value. Regarding IUL, each company will have different features and benefits that you want to consider.

A properly structured IUL is key to a successful tax-free retirement plan. It is our job to help you.  You can start by using our IUL calculator on this page or call us at 1-800-712-8519.

Frequently Asked Questions

What is Tax-Free Retirement?

Tax-free retirement refers to financial strategies and plans that allow you to accumulate and withdraw funds without incurring income taxes, particularly during retirement years.

How does Indexed Universal Life (IUL) insurance support Tax-Free Retirement?

IUL policies provide tax-free cash value growth and allow tax-free withdrawals and loans, making them an effective tool for tax-free retirement planning.

Are there contribution limits for Tax-Free Retirement plans like IUL?

Unlike traditional retirement accounts, IUL policies typically do not have government-mandated contribution limits.

Can I access my IUL funds before retirement without penalties?

IUL policies offer flexibility, allowing you to access funds through loans or withdrawals, often without early withdrawal penalties.

Is an IUL tax deductible?

No, you can not deduct your premium contributions from your taxes.

author avatar
Doug Mitchell, CLU Independant Advisor
Doug Mitchell, CLU holds a BA degree in Finance from Auburn University as well as having obtained a Chartered Life Underwriter (CLU) designation from The American College in Bryn Mahr, PA. Doug has spent almost 30 years in the life insurance industry and has also held licenses to sell securities, long-term care insurance and home and auto insurance. Doug is a Top of the Table Million Dollar Round Table member (MDRT).  MDRT is a global, independent association of the world's leading life insurance advisors.  For two years, Doug served as President of the Auburn Opelika Association of Financial Advisors and has been a member of the Million Dollar Round Table. He obtained Life Millionaire status at Horace Mann Insurance Company and was awarded the Life Agent of the Year Award. Later in his career with New York Life he was an Executive Council Member. Doug currently serves as President of Ogletree Financial, a managing general agency serving life insurance agents and clients in all parts of the United States. Today, Doug’s main focus is servicing 1000s of policyholders and growing the agency through the reach of