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October 02, 2014 at 01:54 PM
Life insurance is often bought and sold based on the size of a death benefit. That is, after all, the long-established value proposition of a life insurance policy: it is an asset that provides financial protection in the event of death. However, in recent years, product development efforts have focused on making life insurance policies valuable during one’s lifetime, in addition to providing death benefit protection.
One of the compelling “living benefits” of a properly designed Indexed Universal life (IUL) insurance policy is supplemental retirement income. Today, with retirement confidence levels continuing to slip, and projections that the Social Security retirement and disability trust funds will become depleted by 20331, clients need options to complement workplace retirement savings plans and close gaps in their retirement portfolio. While investments such as stocks, bonds, and mutual funds may be natural retirement portfolio considerations, the tax-advantaged growth potential and tax-efficient cash distributions of Indexed Universal life (IUL) insurance are often overlooked.
Generally speaking, in addition to a death benefit, single-life and survivorship IUL policies offer cash value growth potential through account options that credit interest based on the performance of a market index such as the S&P 500. Fixed accounts are also commonly available. The cash value can be accessed through loans or withdrawals of the policy value2.
Provided the IUL policy is not a modified endowment contract (MEC)3, the cash accumulation and distributions offer tax advantages similar to a Roth retirement account. An IUL policy’s account value is able to grow tax-free, and cash value accessed from the policy is not taxed because it is not considered income under current law. This results in greater net cash flow without impacting the client’s tax status.
This is significant as taxes are often an overlooked aspect of retirement planning. A recent Lincoln Financial Group Survey found that 36 percent of retirees said taxes were a larger expense than they had anticipated, while 23 percent didn’t even consider planning for taxes as an expense prior to retirement4.
The “non-income” categorization of the distributions also means there is no effect on how much clients receive in Social Security benefits, pay in capital gains or Medicare premiums, all of which are impacted by Adjusted Gross Income or Modified Adjusted Gross Income, and commonly impacted by other classes of retirement assets. Putting the advantages to work
When considering post-retirement expenses, generally speaking there are four categories (see chart): ‘Needs,’ ‘Wants,’ ‘Dreams’ and ‘Legacy.’ Often, the distribution phase of retirement is structured where:
traditional assets such as a 401K or social security fund the ‘needs’ and some of the ‘wants’;
