Using Indexed UL to Supplement Tax-Free Retirement Income

An Indexed Universal Life (IUL) insurance policy can be a valuable tool for generating tax-free income in retirement due to its unique combination of life insurance and cash value growth tied to stock market indexes. Here’s how it works and why it might be beneficial:

How an IUL Policy Works

1. Premium Payments: A portion of your premium goes toward the cost of insurance, while the rest funds a cash value account.
2. Indexed Growth: The cash value grows based on the performance of a selected market index (e.g., S&P 500) with cap and floor limits. This means you participate in market gains up to a certain cap while being protected from losses with a guaranteed minimum return (usually 0% or slightly higher).
3. Tax Advantages: The cash value grows tax-deferred, meaning you don’t pay taxes on the growth as long as the money stays in the policy.

Benefits of Using IUL for Tax-Free Retirement Income

• Tax-Free Withdrawals via Loans: You can take policy loans against the cash value, which are not taxable as long as the policy remains in force. These loans don’t require repayment during your lifetime, though they will reduce the death benefit.
• Tax-Deferred Growth: The cash value grows without being subject to annual income taxes, allowing more significant accumulation over time compared to taxable investment accounts.
• Flexibility in Contributions: Unlike retirement accounts with contribution limits (e.g., IRAs or 401(k)s), IUL policies allow more flexibility, especially for high-income individuals looking to put aside larger amounts.
• Market Protection: Since the cash value is linked to an index but protected by a floor, your money is safeguarded from market downturns, which helps preserve your retirement income during volatile markets.
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• No Required Minimum Distributions (RMDs): Unlike traditional retirement accounts, IULs do not require you to withdraw funds at a certain age, providing more control over your retirement income.

Considerations

• Cost of Insurance: The policy’s fees, especially in later years, can be high. It’s essential to monitor these costs to ensure the policy remains sustainable carefully.
• Loan Interest: While loans are tax-free, they accrue interest. If the loans and interest grow too large relative to the cash value, the policy could lapse, leading to potential tax consequences.
• Funding Requirements: The policy needs to be sufficiently funded early on to maximize cash value growth.

Ideal Candidates for IUL

• Individuals looking for an additional source of tax-free income in retirement.
• Those who have maxed out traditional retirement accounts and need another tax-advantaged vehicle.
• People seeking a combination of life insurance protection and investment growth.

For this and other ideas don’t hesitate to give us a call… We are here to serve!

Jeff Snowden

720-837-6942