Retirement Income Planning
There are many ways to prepare for retirement. You could put money into a savings account, invest in mutual funds, buy real estate, trade stocks, get a 401k and more. Though we aren’t the bank and we are not able to provide mutual funds, we do have a powerful component to a retirement planning portfolio that may surprise most people. As we are sure you guessed, it is a form of life insurance, but it is not as simple as a standard term or whole life policy. The plan we offer that has set thousands up for retirement in a big way is called the Indexed Universal Life policy. Whether you have heard good or bad things about this policy is irrelevant because today we will talk about everything and you can decide for yourself.
The benefit of an IUL, unfortunately, a lot of times is dependent upon the knowledge of the agent you are meeting with. Luckily, we have many skilled agents who are well trained to optimize the plan for different situations. Like everything else, it makes the most sense to break this type of policy down into its individual components and then build it back up again.
Life Insurance: This may seem obvious, but there is a reason we actually listed this as a component. A lot of agents will talk about IUL’s as if they are only retirement vehicles. While it is accurate that they do have a powerful tax advantaged component to them, Indexed Universal Life Insurance polices are life insurance first and a cash accumulation vehicle second. These policies can have coverage amounts in the millions or as little as $50,000. Their death benefit amount can also be designed to go up or stay level over time. It all will depends on your goals and that can be discussed with one of our agents.
Living Benefits: While we are still on the life insurance side of things, we should mention that these policies, like mortgage protection and final expense, have an accelerated death benefit rider that allows you to access the death benefit in advance under extreme circumstances. If you need a detailed description of what exactly these benefits are they can be found on the final expense page.
Cash Account: The biggest distinction between IUL’s and most any other policy is the cash value attached to it and the way that it grows. In term insurance, cash value mostly does not exist. In whole life insurance, it exists but it grows at a fixed rate. In this policy the cash value not only exists, but it grows at the same rate as the index it is attached to. If you need to familiarize yourself with indexes and how they work please read the section under Retirement Income Protection. When this growth strategy is used the cash value goes up with the stock market up to a cap usually a little higher or lower than 10% and never goes down when the stock market goes down. This means when your cash grows your gains are locked, unless you withdraw money or take a loan from the policy.
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What happens If the policy is designed wrong?
When you meet with your agent, they will not design the policy this way, but just to show you that these policies can be structured wrong lets explain a poorly designed policy. So, like we talked about before, these policies are one part life insurance and one part cash value. It goes without saying that life insurance costs money right? Well, as you get older life insurance costs more money. Let’s say you want a $100,000 policy, but you only want to pay $100 per month. When you are young you can do that. What happens is that every time you pay that $100 a portion pays for “the cost of life insurance” and a portion goes into a cash account. Everything seems fine because you are getting cheap permanent insurance and saving for retirement at the same time.
Now lets fast forward ten years. What happens? Your “cost of insurance” went up because you are older and unfortunately more likely to die if only by a little. Everything seems fine because you have a solid cash account that is growing and the $100 is covering your cost of insurance. In another ten years, your cost of insurance goes up again and the $100 is not covering it. So, the policy will start automatically pulling from the cash value. After ten more years your cash value might be gone and your cost of insurance is through the roof, so you are forced to let the policy lapse. This is how a policy can be set up wrong and ends up hurting you.
What happens when a policy is set up right?
If a 25 year old individual wanted to look more into Indexed Universal Life and they met with one of our trusted agents, the agent would provide them with a more realistic scenario. Take the same situation as in the last except the person now contributes $300 to their IUL every month. This may seem like a lot, but you must remember we are saving for a healthy retirement in this scenario. Like in the last example a portion goes to cover the “cost of insurance” and a portion goes to the cash account. Only this time much more goes into the cash account because the cost of insurance is the same. When ten years passes, the cost of insurance goes up, but a significant portion is still going to the cash account. The same is the case in 20 and even 30 years.
Now after 40 years of paying into the policy the person retires and decides they want to stop paying at 65 years old. Luckily, the client had a good agent that planned for this and structured the policy so that the cash value was so large that it could fund the policy for the rest of their life. Not only that, but the agent also designed it so the client could pull income out at a fixed amount for years even decades to come. The client was then able to pull out $60,000 every year until they passed away, leaving a significant sum of money left over for their family.
How does this even work?
The first time anyone hears about this type of situation it seems too good to be true; however, it all comes down to compound interest and the ability to take loans from your policy. Let’s say over 40 years the cash value goes up to $400,000 and you want to start drawing an income. Naturally, you would think that the account will be dried up in seven years if you wanted to take $60,000 out, or ten years with a more modest $40,000. This is where the magic happens.
In some IUL plans there is something called a blended loan that allows you to take the money out, but doesn’t change the balance of the cash account. This “blended loan” would allow you to take your $40,000 off of the $400,000 and the $400,000 would stay the same. The carrier does this because they state the client will eventually pay it back, even if you don’t. The benefit to this is that the interest for the next year is credited to the $400,000, not a reduced amount. However, since you do technically have a loan out, there is interest on the money you took out. Let’s say the interest on your loan is 5.5%, but this year the stock market went up 7%. The result? You loaned $40,000, and your cash value went from $400,000 to $406,000.
General Features of Indexed Universal Life Policies
Flexible premiums: You may increase your premium contribution at any point, and though it is not recommended, you can typically decrease it. As we discussed before, this may result in a lapsed policy.
Level or Increasing death benefit: You have the option to choose a policy that has a death benefit which increases over time, or one that stays the same.
Full Underwriting: Though we do have options for IUL’s that require little underwriting, we feel it is more common among carriers to have a thorough underwriting process when looking at these types of policies. This means that the carrier may request a physical exam, along with blood and urine testing.
Guaranteed periods: A lot of IUL’s have a guaranteed length of time that they will remain in place as long as the minimum premium is paid and regardless of cash value.ph