Life insurance is one of the best products that you’ll ever purchase for your family, but it may not be one of the best investments that you’ll ever make.
It can be confusing because of all the different options available.
The life insurance market is constantly changing, and there have been several new kinds of products introduced to the market.
If you are in your 20’s, you are not much older than Indexed Universal Life is.
Transamerica was the first to come out with this very unique universal life insurance policy back in 1997.
I would like to share with you the top 4 reasons to buy IUL. The idea of being able to have a cash value life insurance policy that could generate stock market-like returns without having the risk of being in the stock market was a genius idea.
Many of my clients don’t really want to talk about anything other than term life insurance. That is until I am able to educate them on why they would even want to buy an indexed universal life insurance policy. The question I get a lot from younger clients is should I get life insurance in my 20s?
When we are fresh out of college and thrust into the real world, we really don’t know much about how finances work. We meet with the 401k guy and the employee benefits guy shortly after we start to get our financial futures all set up. It all sounds good but compared to what?
Unlike our Parents and Grandparents, our first job is probably not where we will end up. It will be a stepping stone. Our younger generation tends to have several jobs before we find that perfect job.
So let’s dig into why an indexed universal life insurance policy is a great idea for someone in their 20’s. This article is going to explore the different advantages and disadvantages of IUL plans. We know that it can be confusing, but we are here to help. Hopefully, this article is going to answer all of the questions that you have.
Table of Contents
Top 4 Reasons To Buy IUL for Retirement Income Planning
- Your tax bracket
- Your desire to have a steady income at retirement like your parents and grandparents
- Your need for life insurance and living benefits
- Your likeliness to change jobs
Why not pay taxes on the small amount of money being contributed now instead of the large amount of money that will come out at retirement?
The idea behind the 401k is to defer income today while in a higher tax bracket than we will be in when we retire.
You may not have noticed that our government’s debt is now approaching $20 trillion.
Where will the money come from to satisfy this debt? TAXES!
In 1980, it was under $1 trillion. In 1980, the top federal tax rate was 70%! It was even higher in the 50’s and 60’s at 90%. Federal Tax Rate History So do you think that taxes will go back up? We have already seen this in the last few years.
Do you think you are in a higher tax bracket now than you will be when you retire? The question is would you rather pay taxes at today’s rate or at retirement 40 years from now?
Would you rather pay taxes on the seed or the harvest?
The income from an indexed universal life insurance policy is paid to you TAX-FREE!
Hear from Tax Expert Ed Slott.
Your Desire To Have a Steady Income at Retirement Like Your Parents and Grandparents
Now, this is my favorite part of why you should buy an indexed universal life insurance policy while you are in your 20’s. TIME is on your side and your best friend when it comes to investing in your future. I am sure that you don’t yet fully understand that a life insurance policy could be a source of retirement income but let me give a brief explanation.
Let’s assume that you are 25 years old and want to sock away $500 per month towards your retirement goal.
Also assume that you want to retire when you are 65 like most do today.
Well, if we were to take that $500 per month and buy an indexed universal life policy until you reach age 65, that would create a bucket of cash that would generate about $90,000 tax-free per year every year from age 65 through age 100.
This certainly proves that it’s a good idea to get life insurance in your 20s.
That is only assuming that you make 7% return on the policy each year. It would create over $52,000 tax-free per year if you only got a 6% return. That is what 40 years of growth and compound interest will do for you. In fact, you can create enough wealth to significantly increase your retirement income if you begin investing in life insurance in your 50s.
In addition to the income that the policy will create, you will also have the death benefit and the living benefits. The death benefit will be over $700,000 and paid directly to your family tax-free in the event of your death.
The Roth IRA can’t provide that much income nor does the Roth have a life insurance payout.
Your Need For Life Insurance and Living Benefits
Now this one is the tough one. See, in our 20’s we don’t think we are going to die, get cancer or another disease, be disabled in an automobile accident, etc… so why spend money on life insurance in your 20s? Well, I am 48 yrs old now and I thought the same thing. I had some rough times in my 20’s where I lost some great friends.
Not only do indexed universal life insurance policies provide a tax-free retirement income stream and pay lump sum benefits to our beneficiaries, they will pay us directly in the event of a critical, chronic or terminal illness. This is an especially good argument for having life insurance in your 50s.
So there is protection for us in the event of stroke, cancer, accident, and the list goes on. You can read more about those benefits in our blog post about living benefits.
Likeliness to Change Jobs
Let’s face it. We will change jobs. 401k plans do not change with us and we will have to either roll these existing plans to an IRA or our new 401k creating new fees and commissions.
An Indexed universal life insurance policy is yours to keep forever.
You can take it with you wherever you go.
You can also start and stop premium payments if needed.
Sometimes life happens and we need to redirect our funds to other areas – it’s ok.
Getting Cheaper Life Insurance
Regardless of which type of insurance policy that you buy, it’s vital that you’re getting the lowest premiums available. There are several ways that you can secure lower rates from the insurance company, which is going to mean more money in your pockets every month.
The first thing that you should do is cut out any cigarettes. If you’re a smoker, you’re a much greater risk to the insurance company. They are going to offset that risk by charging you higher premiums. In fact, smokers pay at least twice as much for their life insurance versus an applicant that doesn’t smoke. If you want to save thousands of dollars, it’s time to cut those smokes.
Another way to save money is to improve your overall health. Before the company gives you insurance coverage, they’re going to require that you take a medical exam, and the results of the exam are going to play a major role in your premiums. If you want to save money, you’ll need to get better results. The two easiest ways to do that are by getting exercise and sticking to a healthy diet. Both of these will help you lose weight, lower your blood pressure, and reduce your chances of being diagnosed with health complications.
The best way to ensure that you’re getting the perfect plan to meet your needs is to work with an independent insurance agent. Unlike a traditional insurance agent, independent brokers work with dozens of highly rated companies across the nation. Every insurance company is different, and you’ll get drastically varying rates based on which company that you would get the quote from.
Working with one of our independent insurance brokers can save you both time and money on your life insurance plan. We have years of experience working with all types of clients to get them the insurance plan that works best for them.
So I hope you can see that now is the time to at least consider an indexed universal life insurance policy. $500 per month may not be your magic number. It may be $200 per month or $2000 per month.
We can take your magic number and create a personalized quote that you can take a look at and decide for yourself.
Finally, if you’re concerned about buying life insurance in your 50s, check out this article on the subject.
What Indexed Life Insurance Policy is the Best?
There are now over 40 life insurance companies that offer indexed universal life insurance policies. Of course we have our favorites, but you should check out our reviews on the following companies that offer indexed universal life insurance:
- North American / Midland National
- American General
- Lincoln National
- American National
- Mutual of Omaha
- Minnesota Life
We are a broker for all of the major indexed universal life companies and can help you find the best one available for your situation.
Frequently asked Questions
How are the withdrawals from an IUL not taxable?
When you take money out of your IUL cash account using a policy loan, the IRS does not consider the loan income and therefore it is non-taxable. You can take loans on a regular basis during retirement to create a stream of non-taxable income.
Do I have to pay the IUL loans back?
Although you will be charged interest on your loan (far less than tax liability), you do not have to repay it. Any outstanding loans will be deducted from the death benefit to your beneficiary(s) when you die.
I’ve read that IULs are flexible. Does that mean I can increase the death benefit?
You can increase your death benefit in your IUL after proving insurability which will likely include a medical exam.
Isn’t it better to invest with before tax money?
Why not pay taxes on the small amount of money being contributed now instead of the large amount of money that will come out at retirement? The U.S. debt is astronomical and growing everyday. The only way the government can pay it down is to increase taxes. Tax increases are imminent. Would you rather pay taxes on the seed or the harvest?