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(Intro): In today’s video we will be answering the question the most Frequently asked questions about indexed universal life insurance or also known as IUL. We will be discussing a handful of frequently asked questions that we get all the time about IUL. Some questions include how does Iul or indexed universal life insurance works? Again, when I say IUL I just mean indexed universal life insurance, but we will use the acronym IUL for short. Then we will explain what are some of the pros & cons of owning a IUL.
Lets get into it!
(What is IUL?): An indexed universal life insurance is the latest of the cash value life insurance. One of the first question we get about IUL is when was indexed universal life insurance created? Universal life insurance was created in 1980 but the indexed universal life insurance was created in 1990s. And if you have been following my channel you will know that life insurance has two engines. One that eats your money, which we call, cost of insurance and one that grows your money, which we call, cash value. In a IUL the engine that grows your money is indexed. See the video of 3 ways your money grows. I will show you shortly what using a indexed strategy will look like with numbers and I will draw it out to show you the concept later on this video.
One thing I wanted to point out is that the cash value growth of an IUL is not in an index mutual fund, but rather linked or mirror to an index like the S&P 500. Which means that your cash value is not actually in the market in an index mutual fund. The insurance company just uses the rate that the index is linked to, to credit your interest for the cash value at that moment.
One of the features of an IUL is the floor & cap strategy. Please watch my other video on what is a floor & cap to get a better understanding of floor & cap strategy. A floor is the minimum your cash value will get. So for instance if the cap was at 0% and the S&P 500 goes negative then your money is safe on the sideline earning a 0% rate of return. And wouldn’t you agree with me that when the market is going down it is better to have a zero then a negative right? Remember 2008.
And the maximum you can receive on your cash value growth is called a cap. So for instance if the index you are linked to yields 10%, 11%, 12% then you will get 10%, 11%, 12% but if the index you are linked to is yielding higher then the cap then the insurance company gets to keep anything above the cap in exchange for protecting your money from going negative.
Lets see what it looks like with a floor & Cap applied to some number for an example.
(Explaining the IUL strategy without floor & cap): So lets see what it looks like without a floor & cap and I will show you what it looks like with a floor and cap for comparison. So in this example , let say you had a $100 to save. At the end of the year 1, the S&p500 returns a 12% so that 12% is added to your initial amount of $100 giving you $112. Now, let say the following year the S&P 500 yields a negative 5% then that negative 5% is applied to the total of $112 bringing down your total to $106.4. Then in year 3 the S&P 500 yielded a return of 20% ! The 20% is added to the balance which brings it to the new balance of $127.68. Now in year 4 the S&P 500 yields a negative -10% which will give you a balance of $114.84 at the end of 4 years.
Now let see what it looks like if we apply the floor of 0% and a cap of 12% to see what that looks like.
(Explaining the IUL strategy with a floor & cap): So lets see what it looks like with a floor and cap in my second example. At the end of year 1 , the index that you are linked to yielded a 12% return which gave you a ending balance of $112. In year 2, the index that you are linked to yielded a return of negative 5% since there is a floor protection you earned 0% that year. Hey 0% return is better then losing money! In year 3 the index that you are linked to yielded 20% , with the cap you will get 12% for that year on your cash value, bringing your total to $125.44. In year 4 the same example yielded negative 10% so the floor is protecting your money again from any loses. Since it yielded a 0% return your balance is at $125.44. Now keep in mind that this example is just an example to illustrate the power of using a floor & cap and not actual real returns of the S&P 500. Additionally these numbers do not include fees, costs, or charges. So would you rather have $114.84 without a floor & cap or $125.44 after 4 years using a floor and cap strategy. Would you rather have $114.84 or would you rather have $125.44? Now that you have seen it with numbers, next I will show you a floor a cap using a graph.
(Explaining the IUL strategy with a floor & cap on a graph): So the red line represents your money without a floor & cap. It can go up or down at any time. Kind of like a roller coaster. I like roller coaster but not on my money! And the green line represents your money with a floor & cap. But the difference is that when the market goes down your money goes flat and when the market starts climbing back up you climb back up at a higher position. And you don’t waste any time recouping from the lost. So as you can see the green line ends up at a higher position since you don’t have to start from a lower position due to the floor protection. Would you rather have the red line or the green line on your savings? Now imagine what that will look like on your money if you never had a “negative” year. So with the floor it is protecting your money from losses. I would think it is a pretty safe vehicle to save your money in which will lead me to my next question I want to answer is, Are IUL Safe? And wouldn’t you agree with me with that with the floor protecting your money it is pretty safe place to save your money?. With the floor and cap protecting your money from loses, I would say the IUL is pretty safe vehicle because of this feature.
Next lets talk about taxes when saving money in a IUL. We can’t talk about retirement vehicles without talking about the tax implications on our money during retirement!
(Tax implication) The next question we want to answer is , Are IUL tax free? So to remind everyone of the three buckets of taxes and as you can see the IUL is in the tax-free bucket which means that any growth is tax –deferred and then when you can access the money it is tax free! The next frequently asked question I want to answer is , is Indexed universal life insurance good for retirement? I think it is a great tool for retirement because of the following reasons: 1. There is no required minimum distribution (RMD ) on money in a IUL because uncle sam already got his cut when you put the money in. A RMD is a required minimum distribution starting at age 72.5 where uncle sam forces you to start taking out income from your IRA / 401k / Etc. and if you don’t take out the minimum required distribution you will owe 50% of the previous year amount to uncle sam in taxes. This is a way uncle sam forces you to take out an income so you cant keep growing your money in a retirement account forever. 2. You can still earn double digit returns up to the cap of course, but if your money is in a 401k / IRA then it is subject to market volatility. Most financial institution will tell you to take your money out of the market in your retirement age because you wont have the time to bounce back if the market takes a dip but in a IUL you can “be in a market” without being in the market. Since an IUL isn’t in the market but rather linked or mirrors an index of your choosing. 3. No taxes on distribution. This is important because if you need to 100,000 to live then you can just take out a 100,000 from your cash value. However, in a 401k/IRA you will have to take out more then $130,000 (depending on your tax bracket) from your 401k to end up with a $100,000 in hand. Ultimately this will make your money last longer if you don’t have to take out extra money to account for the required taxes. And in retirement everyone fears of out living their money, so don’t let this happen to you and your loved ones! So based on the tax savings component alone , do you think it is a good tool for retirement? I think it is a great tool for retirement because the tax bill in retirement could be really high and on top of that it is in a time when we aren’t working so we need to protect our money from taxes even more. Additionally, we didn’t even speak about any of the health benefits or living benefits riders that we can use with our IUL too. We only discussed the tax implications on a IUL so we can make a equal comparison to a 401k /IRA or a retirement account only.
Now lets discuss some of the pros & cons of owning a IUL.
(Pros): The first pro from owning a IUL is that there is zero risk since your money has a floor protection. The next Pro for owning a IUL is the floor protection. Can “participate” in the market without actually being in the market. Tax free loans and withdrawls. The next pro is that your IUL can add living benefit riders which means you can use the proceed of your life insurance at before you die. Next pro for owning a IUL is that there is a tax free loan and tax free withdrawls without being age 59.5 like a 401k. Flexible in its funding. Can earn up to the Cap. No RMD required.
(Con): The first downside from owning a IUL is that you have to qualify since it is a life insurance program. Costs are related to health, age, gender, etc. Have to max fund it to really see its power. And when I say max fund it just means to pay the maximum premiums allowed per your allowed face value. No guarantees or dividends like whole life. May not qualify for all living benefit riders if your health isn’t at its best.
Now that you understand the pros & cons of owning a IUL. Lets summarize what we learned today.
(Conclusion): So why is IUL good? It is good because of three reasons, 1. It accumulates tax free and you can access the money tax free and then when you die it blossoms and goes to your heirs as a pile of tax free money! So in conclusion owning a IUL is a great product if you want to have a set it and forget it strategy to your savings. No other financial vehicles can do these 3 things, most can only achieve 1 or 2 of these benefits. Since it is a universal the monthly amounts are flexible, meaning you can pay more or less depending on your financial situation. On the other hand, you have to max fund the IUL to truly see the power of owning a IUL and lastly it is a life insurance product so you must qualify for it.
If you think IUL is right for you and you have the question about where to buy an IUL , please check out my video of where to buy an IUL and it can point you in the direction of what to look for when you are shopping for an IUL provider.
(Mission): We have a mission of educating 1 million families on the importance of life insurance. If you are looking for a part time or a full time opportunity where you can work remotely, I can show you how to get licensed , appointed and then teach you the words so you too can start helping people with their life insurance needs on a part time / flexible basis. Text me at (415)385-9116 or reach out to me at [email protected] or learn more at moolahwise.com. Thanks for listening. Bye for now.
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