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IUL Tax Free Retirement


Reviewed By: Rob Pinner

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

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Fact Check By: 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.

Many of our clients today are looking for ways to use indexed universal life (IUL) as a way to build an IUL tax free income retirement, save for college, or have cash in hand during an emergency.

If you are looking to use IUL to help reduce income taxes during retirement, you must design your policy correctly.    We are going to explain how to design your policy and also show you some real-life examples using actual numbers from actual insurance companies.

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

According to the Life Insurance and Marketing Research Association (LIMRA), 23% of all life insurance purchased in 2023 has been indexed universal life.   

In our opinion, Warren Buffet said it best.  He is very good at what he does – no, he is the best at what he does.  What would happen if everyone could follow Buffet’s rules of investing and never lose money?

How much money would you have saved by now? How much sooner could you retire to enjoy life?   Indexed universal life, also known as index life insurance was created more than two decades ago by Transamerica Life Insurance Company.

Now, there are over 40 companies that offer IUL. The IUL product has evolved and gotten better each year.  The principal, however, has remained the same.  

Rule No.1 is never lose money

Rule No.2 is never forget Rule No. 1

Warren Buffett



Warren Buffett Forbes


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, you don’t get a tax deduction for what you pay into the policy (your contributions).

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


What is Indexed Universal Life Insurance?


  • IUL is a form of universal life insurance with cash value that grows based on certain stock market indexes
  • The cash value grows when the chosen stock index has a positive gain
  • IUL is a life insurance policy that provides a lump sum of tax-free cash to your beneficiaries when you die.
  • IUL can also pay you cash if you don’t die but suffer a critical illness like heart attack, stroke or cancer diagnosis.
  • IUL can also provide you with money to cover long term care expenses if you need it.

We will demonstrate how you can use your IUL policy to create a tax-free retirement income cash flow. Virtually everyone needs life insurance, they just don’t want to pay for it. 

After all, wouldn’t you rather take that summer beach trip or winter ski trip instead of paying a life insurance premium?  

In about 2 minutes you can learn how to accumulate enough wealth for a LifeTime of Tax-Free Income

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’s 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, or to 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 on these policies is currently around 10% to 11% but we will use more conservative rates like 6% in our examples.

What is 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 not invested directly in the stock market. It’s like earning from the market without being in the market.  


IUL Comparison to the S&P Index


Average s&p return as of 2023


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. 

Most recent crashes were in 2000 and 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 to investors, especially if 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 as a vehicle to accumulate wealth to later fund retirement with tax-free income.  


Here is a Typical Example of how IUL Works

Meet Peter, a typical candidate for IUL.  Peter is married and works as an attorney. He is 35 years old and wants to retire at 65 like most of us do.  Let’s assume that 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 LIRP 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 LIRP 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 rarely ever 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 take advantage of IUL insurance to supplement a 401(k) or IRA, Peter would still realize a substantial benefit:  

Sample LIRP 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 as to what amount you can contribute like in a 401k,  IRA, or ROTH IRA. I get the question how much money should I 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 that you have more than just one bucket of retirement savings and not depend 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 which will allow 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 that can be 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 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 loan.  

Best way to design your IUL policy

  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 amount 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.ds


  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 time line we can develop a contribution schedule that allows for the most premium going into your policy as  possible.  This may be a short pay where we get all the funds into your policy over 5 years or maybe a plan that you make consistent premium contributions until you are ready to take your tax free income stream.

If applicants can follow these very simple rules, their IUL policy will 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 not considered income, the income stream from your IUL will not interfere with your social security income.


What about Pros and Cons of Indexed Universal Life?

Every insurance or investment product has pros and cons.  Advantages and disadvantages are mostly determined by the original need for the product. In other words, it’s not necessarily the product being examined, but rather, the circumstances the applicant is applying it to.

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 S&P MidCap 400
  • The Dow Jones Industrial Average
  • The NASDAQ 100
  • The EURO STOXX 50
  • The Russell 2000 Index
  • Multi-Index (A blend of the S&P 500, Russell 2000, and the EURO STOXX 50)
  • High Participation rate S&P
  • BNP Paribas Momentum 5 index
  • Bloomberg US Dynamic Balance Index II

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

It’s very likely that you will see more index options coming in the near future since there are over 30 companies currently offering Indexed Universal Life Insurance.

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, which is 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.  

Common Strategies for Using IUL Insurance

  IUL Strategies


Because the Indexed Universal Life policy is so versatile, it has become a remarkable tool for individuals and businesses who are looking for a wealth accumulation tool that will not be subject to income taxes when it comes time to withdraw funds for retirement or pass the death benefit on to surviving loved ones.  

Estate Planning

Estate planning is for everyone, not just for the wealthy, especially if you have heirs and or charitable organizations that you want to help during your lifetime and after you die. Creating a will is certainly important if you don’t want the court to decide how the assets in your estate are distributed when you die.

And even though the government has been increasing the exemption threshold for estate taxes, there are still a lot of families whose assets will create a tax liability for their heirs.

IUL (index universal life insurance) can be a great solution for these situations because the death benefit is paid tax-free to beneficiaries and not considered part of the policyholder’s estate when they die. In many cases, the policyholder will place the insurance policy in an Irrevocable Life Insurance Trust so the assets in the trust are separated from estate assets and thus not taxable to the heirs.  

Non-Qualified Deferred Compensation Plan

Family-owned businesses are more prevalent today than ever. In fact, these family-owned businesses now produce more than 50% of the nation’s GDP. Now more than ever, there is continuous competition among businesses to recruit and retain highly-skilled workers who are committed to the success of the business they work for.

IUL is a great solution for funding a non-qualified deferred compensation plan or executive bonus plan. Since it’s non-qualified, it doesn’t have to meet the strict rules of qualified plans such as 401ks and can be offered to select employees.

This strategy makes it much easier for the small business owner to administrate the plan and it provides incentives for recruiting as well as a reward for loyalty and retention.  

LIRP, 702(j), and 7702 Plans

A LIRP (Life Insurance Retirement Plan). 702(j) Plan and 7702 Plan are marketing terms for insurance policies designed to be used for retirement planning. When you use IUL for this reason, you are setting up a wealth accumulation plan (with a death benefit) that can become a tax-free income stream during retirement.

The IUL allows the policyholder to invest in selected indices where they can earn considerable interest that grows the cash value in the insurance policy. The cash value, however, is protected by a “floor” rate that is established by the insurance company.

The “floor” (typically 0%) is the minimum amount of interest the plan will earn annually which means your investment is always protected in a volatile market. This type of retirement planning is discussed at length in three books written by David McKnight, a nationally known retirement planning specialist.

The books that can help you learn the most about retirement planning with life insurance are “The Power of Zero” and “Look Before You LIRP” and now David has a new book out titled “The Volatility Shield“.

Many highly paid professionals and business owners realize that traditional retirement products like the IRA and 401(k) have constraints placed on them by the IRS.  These constraints can prevent them from reaching their wealth accumulation goals and will likely cause them to fall short of having enough retirement savings.

Moreover, most companies that offer Indexed Universal Life Insurance also offer an accelerated death benefit that is far cheaper than buying a stand-alone long-term care insurance policy. An accelerated Death Benefit provides for the policyholder to be advanced a large portion of the death benefit if they are diagnosed with a chronic, critical, or terminal illness.  

You are in Control of Your IUL Insurance

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 have access to your cash account 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 in the beginning.  If you need to you can suspend payments for a period of time. You can change your death benefit, premium amount, and premium payment frequency. How flexible is that?

An IUL can be perfect for a healthy high-income earner.  Once you have met your limits of contribution 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 indexed life insurance. 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

As of 2023, There are over 40 companies that you can use for your IUL.  We have a handful that we recommend. We design your policy in the best way so that you have the lowest expenses and best opportunity to grow your cash. 

When you’re shopping for your Indexed universal life policy, it’s important you find the best company that delivers the best value. When it comes to IUL, each company is going to have different features and benefits that you want to consider.

We know shopping for IUL can be a confusing and overwhelming process. It’s our job to help you navigate the insurance waters and connect you with the perfect policy.  


Frequently Asked Questions


How do I make sure my IUL works properly?

Make sure iul works properly

To make sure your IUL earns the interest needed to meet your goals – these 3 things must happen:
1. Structure the IUL properly by purchasing the smallest amount of life insurance possible.
2. Fund the policy with the maximum premium but keep it from becoming a (MEC) modified endowment contract.
3. Make consistent premium payments until the time you want to start taking income from your policy.

What are some good indices to link my policy to?

IUL index allocation options

The S&P 500
The S&P MidCap 400
The Dow Jones Industrial Average
The NASDAQ 100
The Russell 2000 Index
Multi-Index (A blend of the S&P 500, Russell 2000, and the EURO STOXX 50)

What are some reasons to use IUL?

iul for retirement

An IUL policy is a very versatile cash accumulation vehicle and can be a great solutions for many reasons:

1. LIRP – Life Insurance Retirement Plan
2. Tax-Free Retirement Planning
3. Infinite Banking Concept – Create your own bank
4. Estate Planning
5. Non-Qualified Deferred Compensation Plan
6. 702(j) and 7702 plans

What's the best reason to use IUL?

no taxes on iul income

Save on taxes in retirement, eliminate risk on your investment, create a tax free income stream.

Because the Indexed Universal Life policy is so versatile, it has become a remarkable tool for individuals and businesses who are looking for a wealth accumulation tool that will not be subject to income taxes when it comes time to withdraw funds for retirement or pass the death benefit on to surviving loved ones.

What companies have the best Indexed Universal Life?

IUL pros and cons

We track IUL companies on a monthly basis and rank them based on 20 year and 40 year values. We also pay attention to IUL features such as Company Ratings, policy costs, loan options, index options and caps to name a few. Our top 3 IUL companies as of 4 quarter 2019 are:

1. North American (Builder Plus)
2. Allianz (Life Pro+ Advantage)
3. Ameritas (FLX Living Benefits Index UL)
4. AIG – American General (Max Accumulator +)
5. Symetra (Accumulator Select)