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Debunking the myth that IUL is expensive

is iul expensive

“ Life Insurance – The Most Expensive, can be the Best Life Insurance you can Buy!”

A great example from Louis Labash on just how expensive IUL really is.  Once you understand what indexed universal life insurance is all about, you will be able to make better choices.

Meet Joe, he is Considering buying Life Insurance!

Joe is 35 years old and in great health. Joe would like to get the Best Life Insurance you can Buy. He has an excellent middle management position with a Fortune 500 company with future growth opportunities along with great benefits including a 3% dollar for dollar match toward any contributions he made to his 401k account. Joe was taking full advantage of the 401k savings option and then some. He was currently contributing the maximum amount permitted of $17,500 a year to his 401k. He is also happily married to Marie, who currently is a stay at home mom with two young healthy active children, Sally, age 4 and Joe Junior, age 2 ½. Joe is currently in a 28% tax bracket.

Joe was presented with two choices for life insurance from his life insurance agent.

The insurance agent determined that with all of Joe’s responsibilities, including the mortgage on his home and future college expenses that Joe needed to have at least a $1,000,000 of personally owned portable life insurance in addition to the group term life he had through his employer, especially while the children were growing up.

Joe thought that was a realistic amount and wanted to purchase a 20 year term as he believed that was the least expensive way to buy life insurance. The agent provided Joe with a quote of $495 a year for the 20 year level term policy with an A+ rated life insurance company. The total cost to Joe over the 20 years would be $9,300. The guaranteed annual premium for year 21 would then be $11,065 which is more than the previous 20 years premium in total and the premium will increase every year after that.

If Joe maintained his good health he could reapply for a lower rate but if he was unfortunate enough to have some major health issues along the way, he would have to pay that premium or give up the coverage. Joe certainly thought he was going to live longer than 20 years as he was only 35 and close to that I am invincible/immortal thinking age that many younger people have.

The agent mentioned to Joe that he was also in the process of creating a potentially risky as well a fully taxable retirement plan and the income from it can reduce other government benefits he may qualify for by saving so much money in just his 401k plan. Such as higher taxation of Social Security benefits as well as potentially higher medicare health insurance expenses for both he and his wife during retirement

He explained to Joe that by putting all of his savings into the 401k plan, he was also putting all of his savings at risk, as there are no guarantees in these plans. It wasn’t too many years ago, 2008, that most people’s 401k plans became what unfortunately ended up being called 201k plans due to the sudden 40% drop in the stock market. Many people got out of the markets at that time and never got back in to take advantage of the re-surging market.

By putting all of the money into the 401k plan, he is also making that money very inaccessible. If Joe needed access to his money before age 59 ½, provided the plan would allow it, he would have to pay a 10% tax penalty plus income taxes at the then current income tax rates. When accessing the money in the 401k plan it would always be subject to taxes at rates at the top of his tax bracket no matter when he accessed it. Also, after age 70 ½, if Joe doesn’t take out at least the minimum amount required by law he can be subject to an additional 50% tax penalty on the required minimum distribution.

Joe mentioned that he was getting a great company match and the agent agreed that he should certainly take advantage of the match but he could kill two birds with one stone if bought the most expensive $1,000,000 life insurance he could get. Joe thought the agent was getting a little crazy in his thinking but he always tried to be open to new ideas so he said, “Please explain, what birds are you talking about?”

The agent began by simply saying, “Joe, you do know that you need some life insurance and if we do this correctly, you can have a more robust retirement plan than a 401k plan that also includes the life insurance coverage you need as well as critical illness and chronic illness benefits that you may need today as well as for the rest of your life. The Life Insurance retirement plan is not subject to market risk but can still provide market like returns. This insurance plan is more flexible than your 401k plan in regard to contributions and can provide penalty free and tax free access to the money before age 59 ½, as well as during your retirement, all without any government penalties, requirements or limitations. This is a plan that, unlike your 401k plan, also allows any residual monies you have in your plan at death to pass onto your heir’s income tax free. Amazingly, all of this is available to you at no additional cost.”

Joe looked at the agent and said “That sounds too good to be true!”
The agent replied, “Unsurprisingly, I almost always get that very same response to this idea, from my clients.”

The agent then explained that the one key aspect about this idea and the reason this works so well is the extra money that you overpay into this special life insurance policy, does not go to waste. It is your money and it goes into an account set up for you that is tied to one or more major stock market indexes that are only subject to the positive gains of the market and to none of the losses of the market. It all grows tax deferred and when you do take the money out using policy loans, for any reason, it can be accessed as needed at no charge and income tax free. My insurance policy of choice unlike your 401k also includes a 3% underlying guarantee that makes sure you never have to worry about whether or if the market is doing well or not.

There are expenses in the policy to pay for the cost of insurance, policy fees, and administration fees but as time goes by, the expenses are paid out of the index account on a before tax basis and they generally end up being 1/3 to 1/10 the cost of the expenses that you are being charged in your current 401k plan. Also remember, your 401k has no guarantees against losses, no life insurance coverage, no critical illness coverage, and no chronic care coverage, but the 401k does have higher expenses, it is subject to market risk, potential tax penalties if accessed before 59 ½ and it is fully taxable at your top tax rate when the money is accessed, even after you die.

This just may be the Best Life Insurance you can Buy!

The Agent ran some preliminary numbers and it came out like this. If Joe happens to live a long life or a short one, He will always receive more money either as a life insurance death benefit or as spendable income from the insured plan vs. the 401k plan. This plan initially includes a $1,000,000 of permanent life insurance that will grow along with cash value over the next 20 years to provide inflation protection. On a before and after tax basis both the insurance plan and the 401k plan will cost exactly the same. The comparison shows you contributing $14,500 to the 401k plan or $10,440 based on a 28% tax bracket to the life insurance plan to age 67 with both accounts projected to grow at 7% annually. When your 401k plan attempts to match the tax free income available from the life insurance policy starting at age 68 (at a projected 7% growth rate, you could take out a little over $96,000 a year of projected tax free income), the taxable 401k plan requires a before tax withdrawal of $133,369 to match the tax free income from the insurance policy and it runs out of money when you reach age 79 (it would last less than 12 years) whereas the life insurance continues to provide you with $96K+ tax free to age 100 (33 years) and the projected life insurance death benefit at age 100, which is still over $950K, would go to your heirs income tax free.

IUL cash flow vs 401k cash flow

The bottom line Joe, is this, if you live a long or short life, you can safely provide to yourself or to your heirs over 4 times as much money in the form of after tax spendable income, available for necessities as well as the good life, as you would have received by contributing and tying up your current before tax $14,500 contribution into your 401k plan.

A properly structured Max Funded Indexed Universal Life Policy from the right company can be:

“The Best Supplemental Retirement Plan of the 21st Century!”

 Watch the short video:

YouTube video

The Tax laws that enable this were passed by congress in the 1980’s, known as DEFRA, TEFRA, & TAMRA which defined a life insurance contract and can be seen in the IRS code tax law 7702.

Let us show you what a properly designed indexed universal life insurance policy looks like for you.  You can get a quote here or call us at 1-800-715-8519 to get your personalized quote.

Frequently Asked Questions

Is indexed universal life insurance expensive?

Indexed Universal Life insurance is permanent insurance, so it is more expensive than term insurance. But unlike term insurance, Indexed Universal Life insurance accumulates cash value that can be accessed tax-free. It is important to discuss your options with an independent life insurance agent that is knowledgeable about this product. We can help at Ogletree Financial Services!

Why should I pay more for Indexed Universal Life insurance?

The type of life insurance you should buy depends on your personal needs and goals. If you need a death benefit for a fixed period of time and are not looking for a cash value then term insurance may be the product for you. If you are looking for an investment tool to plan for the future then the extra money you will spend on Indexed Universal Life insurance may be the direction you should go. Consult a qualified independent life insurance agent at Ogletree Financial Services to find out more information.

Is Indexed Universal Life better for me than a 401k?

An Indexed Universal Life insurance plan is more flexible than a 401k plan in regard to contributions and it can provide penalty free and tax free access to the money before age 59 ½, as well as during your retirement, all without any government penalties, requirements or limitations. This is a plan that, unlike a 401k plan, also allows any residual monies you have in your plan at death to pass onto your heir’s income tax free.

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