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Indexed Universal Life Insurance Tax Benefits

Q Are Iul Better Than 401k

Indexed Universal Life Insurance for Tax-free Income

These two investments serve different purposes and your needs should dictate which is the better investment for you.

An IUL is a life insurance plan that pays your beneficiary a death benefit while also investing part of your premium into stocks that should provide a favorable return until your death.

A 401k plan is an investment plan that focuses exclusively on a positive return of your investment and does not provide a death benefit.

Who Should Get Indexed Universal Life Insurance

Indexed universal life insurance is a good choice for people who want to protect their investments while still taking advantage of higher rates. However, it is not for everyone. People who have maxed out other investments will benefit from indexed universal life insurance the most.

An insurance agent will help you decide if an indexed universal life insurance policy is right for your individual needs make sure that indexes are included in any comparison shopping you do.

Indexed Universal Life Insurance Meaning And Pros And Cons

Thomas J Catalano is a CFP and Registered Investment Adviser with the state of South Carolina, where he launched his own financial advisory firm in 2018. Thomas’ experience gives him expertise in a variety of areas including investments, retirement, insurance, and financial planning.

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Case Study Of An Iul Compared To Other Financial Vehicles

There are many places to save money for the future. In my opinion, it is important to save some money in a vehicle that protects it from market and tax risk. We create Wealth Reports for clients to show clients how saving money in an IUL will compare to a taxable account , tax-deferred account /IRA), and tax-free account .

Wealth Reports are a lot of information to absorb. I put this video together to walk you through it.

I highly recommend watching this video first to quickly learn how to read the Wealth Report.

You can download this example wealth report as a PDF here:

Balancing Risk And Cash Value Growth

How Does Life Insurance Work?

Indexed universal life insurance offers cash value growth potential that is tied to the movement of an underlying index but does not participate in the market.

Minimum and maximum interest crediting limits act as guardrails, which make indexed universal life less risky than variable universal life insurance, while potentially producing greater interest crediting than fixed universal life insurance.

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Critical Illness Or Critical Injury

This rider provides funds if diagnosed with one of the following illnesses .

Critical illness may include:

Severe Burns Traumatic Brain Injury

According to the CDC, someone in the United States has a stroke every 40 seconds. That means each year, more than 795,000 people in the United States have a stroke. About 610,000 of these are first or new strokes.

We hope you never experience any of these issues. Just in case you do, living benefits can provide peace of mind and money to help you survive.

Downsides Of Iul Insurance

There are many reasons to buy an IUL insurance policy. Like any financial product or policy, though, there are some drawbacks that might hold you back from investing in an IUL. Critics point to high fees associated with permanent life policies, including sales and administrative fees. By contrast, a retirement account, especially one comprised of low-cost ETFs or mutual funds, will lose significantly less to fees.

Someone seeking both life insurance protection and tax-free retirement distributions might be better off getting a term life policy and opening a Roth IRA, rather than trying to combine the benefits into one product.

Other cons of IUL insurance include:

  • Earnings caps: Most policies have a limit on how much you can earn within the plan. When the market is having a particularly good year, your money will earn less than you would just investing directly. Along with this, there are index caps and maximum participation rates that the insurance company can change.
  • Taxable income: If the policy lapses or is surrendered, the money youve taken out may be taxable.

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How To Supercharge Your Indexed Universal Life Policy

What if there were ways to leverage your premium payments to build your cash value larger? A couple of strategies provide additional funding to increase your death benefit and cash value with no additional money out of your pocket.

This is similar to how most Americans use a mortgage to buy a bigger house. You can also use financial leverage to buy a bigger life insurance policy.

Is Indexed Universal Life Insurance Taxable

Why is Indexed Universal Life Insurance (IUL) Income Tax free?

While you can access your cash value in an IUL policy, there are certain cases when taking out the money will be taxable. For instance, you can withdraw up to your basis tax-free. However, any withdrawal that includes a portion of your investment gains before the policy matures will be subject to income taxes for that tax year.

Borrowing against the cash value could also create a taxable event. If you allow the loan interest to deplete the current cash value, your policy can lapse, and you must pay taxes on the loan balance.

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Drawbacks Of Iul Insurance

While there are many different benefits for a policyholder to choose this kind of life insurance, it’s not for everyone. It is important to let the consumer know both sides of the coin. Here are some of the most important things to encourage a client to take into consideration before opting for this choice:

How Does Iul Insurance Work

Like other types of permanent life insurance, the premium payments you make to your IUL policy have the potential to earn interest and grow the cash value of your policy. However, what makes IUL different is the way interest is credited to your policy. In addition to offering a traditional declared interest rate, IUL offers the opportunity to earn interest, subject to caps and floors, that is linked to the performance of a selected choice of market indices such as the S& P500, Dow Jones Industrial Average or the Nasdaq-100.

When the linked index performs well, your cash value builds at a faster rate. In contrast, if the index doesn’t do well, your cash value will accumulate at a slower rate or not at all. The amounts credited to the cash value in your IUL grow tax-deferred, and may be used to pay insurance premiums, providing the flexibility to reduce or even stop making out-of-pocket premiums payments as long as the minimum premium payment is being met. This is because, over time, its also possible to borrow against the cash value of the policy. With IUL, the policyholder decides on the amount allocated among the indexed account and the fixed account.

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Indexed Universal Life Insurance Pros And Cons

If youre planning to retire and you love your familyand were guessing that describes you wellcombining savings and a death benefit in an indexed universal life insurance policy might sound like a win-win. And while a few of the features in an IUL might seem appealing, there are really more catches here than, well, a game of catch.

Lets start with a look at the benefits, then move on to the drawbacks.

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A Roth IRA Alternative?: Tax

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How To Set Up An Iul Account In 4 Steps

Now that weâve discussed the advantages and disadvantages of indexed universal life insurance, letâs explore how to set up an IUL account.

Indexed Universal Life policies are custom tailored to fit the needs of the insured. Thatâs why itâs important to determine what your end goal is when buying one.

Keep in mind the steps below are simply a basic approach to acquiring an IUL and are not designed around a particular strategy.

Lirp 702 And 7702 Plans

A LIRP . 702 Plan and 7702 Plan are marketing terms for insurance policies designed to be used for retirement planning. When you use IUL for this reason, you are setting up a wealth accumulation plan that can become a tax-free income stream during retirement.

The IUL allows the policyholder to invest in selected indices where they can earn considerable interest that grows the cash value in the insurance policy. The cash value, however, is protected by a floor rate that is established by the insurance company.

The floor is the minimum amount of interest the plan will earn annually which means your investment is always protected in a volatile market. This type of retirement planning is discussed at length in three books written by David McKnight, a nationally known retirement planning specialist.

The books that can help you learn the most about retirement planning with life insurance are The Power of Zero and Look Before You LIRP and now David has a new book out titled The Volatility Shield.

Many highly paid professionals and business owners realize that traditional retirement products like the IRA and 401 have constraints placed on them by the IRS. These constraints can prevent them from reaching their wealth accumulation goals and will likely cause them to fall short of having enough retirement savings.

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Whole Life Vs Indexed Universal Life Insurance

Whole life insurance and indexed universal life insurance both fall under the permanent life insurance umbrella but are very different.

Whole life insurance is predictable, making it ideal if you have a low risk tolerance. You know exactly how much you will pay in insurance premiums throughout your life, and the interest rate is set from the beginning of the policy.

A whole life insurance policys annual rate of return is between 1.5% and 3.5%, explained Ed Frye, CEO of Final Expense of America.

On the other hand, an indexed universal life insurance policys rate of return varies based on the stock market. Most insurers will limit your returns and losses, using a minimum floor typically 0% and maximum cap amount typically 15% to reduce volatility. Unlike whole life insurance, your premiums are more flexible you can change your payment amount and frequency. Once you build enough cash value, you can use part of the balance to pay your premiums.

A Guide To Indexed Universal Life Insurance

Indexed Universal Life Insurance – Tax Free Income Using Policy Loans

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If youre looking for coverage that offers the flexibility of universal life insurance and a cash value account with higher growth potential, you might consider indexed universal life insurance. Indexed universal life, or IUL, gives you a chance to experience some of the upsides of the stock market while limiting risk.

There are lots of options, fees and forecasts to understand before you buy an IUL policy. Since it ties cash value to the stock market, IUL coverage comes with more ups and downs than other types of life insurance. But for a savvy investor looking for a policy with flexibility, indexed universal life could be the perfect fit.

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Floors Caps And Participation Rates

The cash value within an IUL wonât mirror an indexâs exact gains and losses:

  • Floor: Youâll find there is a floor in place, which is the minimum rate that will be credited to your cash value. Your floor could be 0%, but that will protect you from losses.
  • Cap: On the flip side, there is usually a cap, meaning your cash value gains wonât go above a certain percentâeven if the index performs above that threshold. For example, if your cap is 10%, and the index goes up 12%, the cash value tied to that index increases by 10%.

Participation rate: Your cash value gains are also calculated according to the âparticipation rate,â which is set by the insurance company. This is the portion of the indexâs return that is credited to your account. It can often range anywhere from 25% to above 100%. If the IUL has a participation rate of 100%, you will earn all of the interest gained by your investments, up to your cap.

Another example is if the participation rate is 50% and the index gained 10% for the month, youâd actually earn 5% for the period. Though the growth is often tracked monthly, the cash value earnings are usually credited to the account once per year or every five years.

While the floor cannot be changed throughout your policy, your insurer will change the cap and/or participation rate in response to changes in market conditions .

Tax Code 7702 Tefra Defra Tamra

I dont want to bore you with the details, but these are IRS Codes that explain what qualifies as life insurance and how life insurance is taxed. As life insurance policies have evolved over the years, the IRS has added these new laws.

Life insurance is an incredible tax shelter. Naturally, the IRS wants to have their say in the plan. These IRS codes set limits on the amount of cash value in the policy compared to the death benefit.

They also established rules on the abuse of life insurance and how it can become taxable. These laws also created the MEC rule and 7-pay test, which well discuss below.

Is this a bad thing? No. Life insurance still has some fantastic tax benefits, but you need to play by the rules.

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Example Of Universal Life Insurance

For example, if the index gained 6% from the beginning of June to the end of June, the 6% is multiplied by the cash value. The resulting interest is added to the cash value. Some policies calculate the index gains as the sum of the changes for the period, while other policies take an average of the daily gains for a month. No interest is credited to the cash account if the index goes down instead of up.

The gains from the index are credited to the policy based on a percentage rate, referred to as the participation rate. The rate is set by the insurance company and can be anywhere from 25% to more than 100%. For example, if the gain is 6%, the participation rate is 50%, and the current cash value total is $10,000, $300 is added to the cash value . IUL policies typically credit the index interest to cash accumulations either once a year or once every five years.

IUL insurance policies reduce risk because no cash is directly invested in the stock market.

Advantage No : An Ability To Take Advantage Of The Design Of Certain Insurance Products

Life Insurance Benefits Taxable

Studies show that the interest crediting on most IUL policies is higher than the interest crediting on most index annuity products. Why? Because insurers have a second source of profit on index universal lifethe spread between the insurers mortality charges versus the expected mortality of the people they insure. In some cases, the insurers are generating much if not all of their profits from the mortality spread. Therefore, customers who buy IUL policies and minimize the insurance coverage relative to the premium they pay get a better deal. From one perspective, this means that the many policyowners who will maximize their insurance coverage relative to the premiums they pay essentially will be subsidizing these customers who maximize their coverage relative to the premiums they pay.

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An IUL policy is indicated whenever the prospect desires the ultimate in life insurance flexibility.

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Indexed Universal Life Insurance: Pros And Cons

Indexed universal life insurance offers flexibility and could give you higher interest rates than other kinds of life insurance. If youre comfortable with the risks and want to be active in the management of your insurance, this could be a nice fit.

However, indexed universal life is more complex than it may appear. While the idea of earning interest based on indexes is simple, the way that ends up working is less straightforward.

Indexed Universal Life And Retirement Planning

An IUL policy can be a good way to provide your loved ones with the protection of a permanent life insurance policy along with the potential to grow and protect its cash value.

If you’re interested in learning more about indexed universal life insurance, contact Protective for a quote.

An indexed universal life insurance policy is not an investment in an index, not a security or stock market investment, and does not participate in any stock or equity investments.

*As long as required premium payments are timely made.

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Using Indexed Universal Life Insurance To Create More Tax

The secret behind McDonalds, Disneyland, and Foster Farmsand the $30 BILLION on Wells Fargos balance sheet.

By/ January 18, 2022

Would you believe that the happiest place on earth, home to Mickey, Minnie, Donald, and Goofy, exists because of life insurance? Animator Walt Disney needed a bank loan to finance his dream of opening a theme park. Turned down for a basic business loan, Disney turned to the accumulated values of his life insurance policies, taking out a policy loan. The proceeds from the policy were used to create the Happiest Place on Earth: Disneyland.

In 1930, Max Foster applied the same thinking by using the cash values of his life insurance policies to purchase an 80-acre farm in Modesto, Calif., which would become Foster Farms, one of the largest chicken producers in the U.S.

While a lot has changed since the days of Walt Disney and Max Foster, one thing hasnt changed: the favorable tax treatment of life insurance cash accumulation and how it can help anyone, using the strategies of the ultra-wealthy, to create tax-free income.

Theres also a new twist on life insurance, one that allows for market-sensitive investing. It allows for investing in the market without taking losses: Zero is your hero. When the market turns down, as it inevitably does, you never lose, period.

Too good to be true?

Whats the story behind this particular asset and why are so many wealthy people using it?

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