When you’re shopping for life insurance, there is no shortage of options. In fact, most people would say there are way too many. One option is to buy an indexed universal life insurance plan. These policies have several unique benefits that are not offered by another type of life insurance plan.
One question I get a lot is how can Indexed universal life insurance be a better retirement savings vehicle than my 401k through work. I think you must understand how an indexed ul policy works before you can answer that question. Another question I get is, Should I buy indexed universal life to help with retirement? You have to know how your money grows and how you can access your cash when you want to retire. There are several things to consider before answering this question.
We’re going to compare the different advantages of an IUL life and will help you decide if one of these plans would work well for you.
Should I buy indexed Universal Life?
Do you need Life Insurance? Keep in mind that this is life insurance. Are there people that depend on you financially that would suffer if you were to die today? Indexed UL can be a great way to protect your family and at the same time help build a secure retirement.
Do you get a match from your employer? If your employer is helping you fund your 401k through a matching contribution, chances are you need to be taking advantage of that. I would say that free money is the best kind of money. At least, contribute to your 401k up to the amount that your employer is matching.
What is your tax bracket? Your tax bracket can play a big part in whether or not to purchase an IUL. When 401ks were first established in 1978 federal income tax rates were as high as 70%. Today we are fortunate not to have 70% income tax rates but many still are taxed at the top rate of 39.6% and that is just the federal income tax. Every dollar that you take out of your 401k or other qualified retirement plan will be taxable at the current tax rate. It makes perfect sense to defer income if you are in a high tax bracket today assuming that your income tax rate will be lower during your retirement years. You are limited to the amount that you can defer so by establishing an IUL can help you avoid increased taxes during retirement.
What is your age? When is the best time to plant a tree? 20 years ago. Your age can play a large part in the decision. The younger you are when you start an IUL the better it will work for you. Although 20 – 60 is really the sweet spot, we also see clients purchase IUL in their 70s. When using the IUL for retirement income, 10 years of contributions and growth is ideal.
How is your health? Your health will also play a role in whether to purchase an IUL. If you have health issues, like a heart issues, then this may not work for you. We do have some companies that have table shave programs that would allow you to get a standard offer in the event you were rated 3 to 4 tables.
How much can you save? A popular school of thought in the financial advisor community is to save at least 20% of your take home pay in long-term savings. So if you are putting 5% – 10% into your qualified plan consider putting the rest in the Indexed UL. If you can save more than 20%, good for you. A couple of things to know about an IUL is that there is no limit on how much you can put in and premium payments are flexible. If you need to take some time off your policy can continue to grow.
How long until you retire? Like I mentioned above, 10 years is really a minimum you would want to contribute to an IUL. So if you are 5 years away, you will need to fund the IUL heavily for at least 5 years and maybe put off receiving income for 5 more.
What is your risk tolerance? 401ks and employer-sponsored plans are typically invested in stocks and mutual funds that are subject to loss. If you have a problem with losing your money from stock fluctuations, then you may want to consider establishing an IUL due to the fact that your money is safe from losses.
Getting Cheaper Indexed Life Insurance
Indexed life insurance plans are never going to be the cheapest. Just because these policies are naturally more expensive doesn’t mean there aren’t ways you can get cheaper insurance.
The easiest ways is to compare DOZENS of carriers before you make any life insurance choice. Why is this so important?
Insurance carriers are just like any other business out there. Each one is going to have different prices for their products. When you’re making a large investment, like life insurance, you want to be sure you have the cheapest possible option. The best way to do that is to do some shopping around.
What’s Your Next Steps?
How should you decide which type of plan is best for you? It can be a confusing decision, but there are a few things you should know when making that choice. First of all, I am not suggesting that you depend solely on indexed universal life insurance for retirement. There are many great places to save your money for later use during retirement, indexed universal life insurance is just one of them. Everybody’s situation is different so it is up to you to decide whether IUL is right for you. We have many educational tools that can help you learn more about indexed universal life. We can also put together a personalized proposal for you so you can see what an IUL would look like in your portfolio. You can give us a call at 1-800-712-8519 or use the contact us form to get your proposal.