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August 18, 2015 at 05:23 AM
Asset allocation in retirement income planning is perhaps one of the most fundamental concepts to ensuring sufficient retirement income while maximizing the growth potential of a client’s assets. While equities, bonds and cash equivalents are some of the traditional asset classes, or buckets, that advisors seek out in designing any given client’s allocation strategy, a new asset class has emerged that may add even greater value for some clients—indexed universal life insurance (IUL).
For the right client, IUL can represent a type of hybrid combination of some of the more traditional asset classes—providing the conservative risk protection elements of a bond along with equity market participation and potential access to tax-free cash later in retirement.
IUL: The Retirement Planning Tool
Indexed universal life insurance policies are cash value life insurance products that are tied to a specific stock index–such as the S&P 500–and provide returns based upon a formula that is tied to market performance. These policies often come with both an earnings cap and an earnings floor, so that, for example, the policy might earn no more than 10%, but no less than 2%, meaning that the policy can continue to grow even in an economic downturn.
This allows clients to continue to participate in the markets with a portion of their retirement assets, because the risk of loss is limited by the policy’s earnings floor. While gain is similarly limited, the risk that a retired client will be forced to hold investments in order to wait for a market recovery (which could impair his or her cash flow for a period) is mitigated.
Eventually, the policy can provide a source of tax-free retirement income for the client. Once the cash value has built up to a substantial level–over a period of years—the client can begin taking tax-free withdrawals to fund retirement, regardless of whether he or she has reached the age at which penalty-free withdrawals from a traditional retirement account become permissible.
If the client’s income level for a given year is higher than expected, IUL can provide a source of tax-free income while allowing assets in traditional accounts to continue to grow.
What to Watch With IUL
