Have you ever stopped to wonder if all that money you’re putting into your 401k is really the best thing you can do to make sure that you have enough money to retire on? Will you outlive your money? Is your savings safe from another market downturn? Indexed universal life or a 401k?
Millions of Americans invest their money in employer sponsored retirement plans simply because it’s all they know. From the day we start our job, that is all we hear. But as we’ve been told countless times, it is always best to explore the options that are available so you can make the most informed decision. One of those options I want to tell you about is indexed universal life insurance, commonly referred to as IUL. You may or may not have heard of IUL, but I can assure you that you will be hearing more in the future. Indexed universal life has been around for about 20 years now and is currently growing in popularity because of its ability to produce income tax-free retirement income that is safe from market risk.
You may be asking, life insurance? I thought this was about saving for retirement? Don’t worry, it is. I want to talk about the two main benefits that an IUL can provide. The obvious first part is that it provides a life insurance payout when you die. But in addition to that, an IUL actually builds cash value throughout the years as you pay your premium. This cash value can then be used to supplement your retirement.
So what is an IUL you ask? As mentioned above it is an indexed universal life insurance policy. Yes, you pay premiums for the policy just like other types of life insurance. The goal of an IUL policy is to earn interest at a higher rate than your traditional universal life insurance policy. When you pay your premium, a portion goes towards the cost of the life insurance and fees and the remainder is added to the cash value of the policy. You allocate your premium to one or more of several different index options that you expect to earn higher than normal interest. Your cash value then grows at the rate at which your selected index options grow. The idea here is to pay as much money as you can into the policy while keeping the amount of life insurance to a minimum.
Now keep in mind that your money is not directly invested in the stock market, which keeps it safe from stock market losses.
In fact, most IUL policies have a guaranteed minimum interest rate around 3% that ensures that you will never have a negative return. You will be able to earn a bigger return while ensuring that your money is not at risk of being lost. You get exposure to the stock market while still protecting yourself from losses.
As mentioned earlier, many people invest their funds for retirement in a 401k. While this does offer benefits of its own, consider what a crash in the market could do to your hard earned money. In 2008, people who lost 50 percent of their funds took on average about 6 years to get their 401k back to where it was before the crash. That’s six years of investing just to get back to where you were. That’s six years of investing that is just plain gone.
But what if you were nearing retirement? Many in this predicament didn’t stay in the market so they never recovered their losses. Imagine if you saved your entire working life for retirement and a year before you retired half of your savings was gone in the flash of an eye.
Doesn’t it make sense to put some of your savings in a vehicle that protects your nest egg and guarantees you a minimum rate of return?
There are fees associated with both a 401k and an IUL. You can count on around 2% fees on your 401k plan. Doesn’t sound like a lot but an average worker will pay around $150,000 in 401k fees over their lifetime and a high income earner will pay closer to $400,000 in 401k fees. So the question then becomes, what are you getting in return for your 2 percent?
Keep in mind that with the IUL you are guaranteed a return and with a 401k you are not. So you may end up paying even though you are not getting anything in return. Over the last 20 years, since IULs have been in existence, IUL returns have been consistently strong. The main reason for this is the floor guarantee. The 401k just can’t provide this same level of safety.
You and I both know that dipping into retirement savings before retirement is a no-no. Sometimes, however, we go through tough times where it is necessary to access those funds.
When you make a withdrawal from your 401k before age 59 ½, you get a 10% penalty in addition to paying federal and state taxes on the amount withdrawn. This will usually propel you to a higher tax bracket than you are currently in. You could lose over half of the withdrawal to income taxes. Imagine if you made a $50,000 withdrawal. You can count on $5,000 just in penalties and you still have to pay taxes on the $50,000. With an IUL you pay no such penalty, regardless of your age. You can withdraw funds or take tax-free loans against your policy. You don’t even have to pay the loans back.
Additional benefits of an IUL that a 401k doesn’t provide are accelerated benefits. What this essentially means is that if you suffer from a critical illness such as a heart attack, cancer, or stroke, funds can be paid to you now. This is an acceleration of the death benefit. Now consider long term care. If you are unable to perform 2 of 6 activities of daily living, most of your death benefit can be accelerated to help cover the cost. Wikipedia lists mobility, bathing, eating, dressing, personal hygiene and using the restroom as the six basic activities of daily living. This money can then be used to cover the cost of long term care. This benefit is considered by many for covering the cost of long term care due to the higher cost of individual long term care insurance.
So let’s look at income at retirement. The 401k is fully taxable since these funds have never been taxed. Income from your indexed universal life insurance policy however will be paid to you tax-free.
Would you rather pay taxes on the seed or the harvest?
If you are in a 25% income bracket at retirement, you would need to withdraw $134,000 from your 401k in order to net $100,000. And, the income from your indexed universal life policy is not taxable as income.
Using IUL as a retirement supplement offers multiple benefits you can not get from your 401k.
- You are providing an income tax-free death benefit for your family.
- You are creating a retirement income stream is tax-free.
- You are protecting yourself from critical, chronic and terminal illnesses.
- You are protecting your retirement savings from market risk.
And unlike other forms of insurance (car, home, long term care, etc.) that you pay for and may never need, an IUL insurance policy is guaranteed to be used. This gives you guaranteed value for the money you put into your policy.
Indexed universal life or a 401k?
Using an IUL as a supplement to a 401k offers you so much more value and benefits. You are guaranteed a minimum return while protecting yourself from things like the market crashes of 2000 and 2008.
Don’t spend years of your life putting all of your retirement savings only in traditional plans just to see it erode away in market crashes like we have seen in the past. We have been able help so many people reach their retirement goals by introducing them to indexed universal life.
We can run a quote for you so that you can see if this fits into your retirement plan. Just use the quote request form on the left of this page or call us at 1-800-712-8519.