How to use an IUL as tax-free retirement savings strategy

Who benefits most? The short answer: High earners who are frustrated with the inflexibility of their other tax-deferred accounts. Who benefits most? The short answer: High earners who are frustrated with the inflexibility of their other tax-deferred accounts.

It’s a fact: Any client with a large IRA has a tax problem. If they don’t use it or leverage it, they will likely lose a significant portion to future taxes. A properly designed, Indexed Universal Life Insurance (IUL) policy offers tax advantages no other single product can provide. It would take a combination of investments to equal all the advantages of an IUL.   

IRS-approved tax advantages

With an IUL, there are no taxes due during the accumulation phase when the policy’s cash value builds up. When your client retires, they can take tax-free distributions of the cash value. IULs also allow the tax-free exchange of one policy for another without triggering income taxes. And when your client passes on, the tax-free death benefit protects their loved ones against financial uncertainty.

Protection against stock market volatility

An IUL provides market-linked gains without market-based risk because it’s not an investment in the stock market. With an IULs principal-protection guarantee, gains from the previous year are locked in and the principal cash value remains the same. To put it simply, even if the stock market crashes, there are no losses.

Flexibility and control

Unlike an IRA or 401(k), there are no limitations on the amount your clients can contribute annually to their IUL. As a result, the IUL can have a high starting cash-value based on what they contribute to the policy.

Even better, your clients can have access to their cash value at any age, any time, for any reason, without paying taxes or penalties. IULs also allow a tax-free exchange of one policy for another, plus the flexibility to change death benefit amounts, premium amounts and payment frequency.

Who benefits most?

The short answer: High earners who are frustrated with the inflexibility of their other tax-deferred accounts. It’s also an excellent option for clients who have maxed out their retirement accounts or find themselves limited in the amount of tax-deferred income they can contribute to their 401(k)s. An IUL is also ideal for clients who earn too much to qualify for a Roth IRA.

For younger clients, an IUL provides a great rollover solution when they’ve accumulated considerable savings in a former employer’s retirement plan. For baby boomers who have been delaying retirement planning longer than they should, an IUL can provide a last chance to secure their retirement years. Of course, the tax-free death benefit offers an advantage to primary wage earners who are concerned about protecting the financial security of loved ones after they’re gone.  

The most cost-effective way to protect their retirement savings

These days, most clients, if not all, are highly concerned about rising taxes and future market fluctuations eroding their retirement savings. Indexed Universal Life Insurance is a cost-effective way to protect their savings from taxes while providing them with supplemental retirement income for their entire lifetime.

There’s another benefit that warrants a mention here. With an IUL, your clients are in control of their own retirement savings and taxes, not their fund managers. 

See also:

5 life insurance plans every financial advisor should know

16 reasons why accountants prefer indexed universal life to mutual funds

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