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The benefits of using Indexed Universal Life Insurance as a Private Retirement Plan

The benefits of using Indexed Universal Life Insurance as a Private Retirement Plan

July 21, 2022
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The benefits of using Indexed Universal Life Insurance as a Private Retirement Plan

Introduction

The wealthy have long used investment-grade life Insurance contracts as a private retirement plan to get tax-deferred growth on their investments and as a shield from any future taxation.

Permanent life insurance is a type of insurance that stays with you for your entire life. It builds cash value over time and provides a death benefit to your beneficiaries upon your passing.

According to industry statistics, over 7.5 Billion dollars are put into Permanent Life Insurance as an asset class per year.

https://insurancenewsnet.com/innarticle/indexed-life-sales-smash-more-records-during-4q-2021-wink-reports

Indexed universal life insurance is one type of permanent life insurance that offers the potential for cash value growth that is linked to the performance of a stock market index, such as the S&P 500, and a death benefit that can help provide financial security for loved ones.

Indexed universal life insurance has become a popular choice for people who are looking for an alternative to traditional investment options, such as stocks, bonds, and mutual funds.


What is the biggest financial pain the wealthy share in common? Taxes

The wealthy often face higher marginal tax rates than other taxpayers. Marginal tax rates are the rates applied to your last dollar of income. In the United States, the marginal tax rates are as follows:

In the U.S. the highest federal tax bracket is currently 37%. This means that any income over $539,900 (for single filers) or $647,850 (for joint filers) is taxed at 37%.

The second highest federal tax bracket is the 35% tax bracket. This means that individuals who have taxable income over $215,951, will pay 35% in taxes. The 35% tax bracket applies to married couples filing jointly with taxable income over $431901.

The third highest federal tax bracket is the 32% tax bracket. This means that individuals who have taxable income over $170,051 will pay 32% in taxes. The 32% tax bracket applies to married couples filing jointly with taxable income over $340,100.

The next federal tax bracket is the 24% tax bracket. This means that individuals who have taxable income over $89,075will pay 24% in taxes. The 24% tax bracket applies to married couples filing jointly with taxable income over $178,150.

For high earners, state and local taxes can add up to more than 10% of their income. So, if you’re in the 37% federal tax bracket and your state has a 13.33% tax rate like California, you could be paying 50.33% of your income in taxes!


What kind of tax liability do the wealthy have?

The average tax liability in retirement plans can vary depending on the type of plan. For example, traditional 401(k)s and IRAs are subject to taxation when the funds are withdrawn in retirement. Participants will receive IRS Form 1099-R, which lets the IRS know how much was distributed to the participant from the account. This means that the account holder will pay ordinary income taxes on the money that they have saved up over their working years. In contrast, IUL offers access to one's cash account via tax-free withdrawals and loans. This means that the annual withdrawal amount will be exempt from taxes. All the policyholder must do is contact their insurance agent, financial professional, or life insurance carrier and request a policy loan or withdrawal option. These features offer a significant advantage for those who are looking to minimize their tax liability in retirement.

Another factor that can impact the average tax liability in retirement plans is the state in which the account holder lives. Some states, such as Florida, do not have a state income tax. This means that the account holder would not have to pay taxes on the money in their retirement account when they withdraw it. In contrast, states like California have a high state income tax rate. This means that the account holder would be subject to paying extra taxes on the money in their retirement account when they withdraw it.

Overall, the average tax liability in retirement plans can vary depending on the type of plan and the state in which the account holder lives. IUL offers several advantages for those who are looking to minimize their tax liability in retirement.


What is Indexed Universal Life Insurance?

Indexed universal life insurance (IUL) is a type of permanent life insurance that offers the policyholder the ability to grow their cash value on a tax-deferred basis. The cash value can be used for retirement income, estate planning, or other financial goals.

IUL policies are different from traditional universal life insurance policies in that the cash value growth is tied to an index, such as the S&P 500. This means that the policyholder's cash value will grow at a rate that is equal to the index's performance, minus any fees and charges.

Since the COVID-19 pandemic, public interest and desire to purchase Indexed Life Insurance have increased.

Indexed Life: Sales for the first quarter of 2022 were $629 million, compared with sales of $533 million for the first quarter of 2021. First quarter indexed life sales were up more than 18% as compared to the same period last year. 

https://aipma.com/media/aipma-blogs-articles/wink-reports-first-quarter-annuity-life-insurance-sales/

Why do the wealthy use IUL as a private retirement plan?

There are several reasons why the wealthy use IUL as a private retirement plan.

First, IUL offers tax-deferred growth on the policyholder's investment. This means that the money in the account can grow and compound without being subject to taxes.

Second, IUL policies offer the potential for higher returns than traditional universal life insurance policies and whole-life policies. This is because the cash value growth is tied to an index, such as the S&P 500. The insurance carrier will first declare a guaranteed floor of 0%, meaning that if the underlying index, for example, the S&P500, were to experience a large negative decline over 1 year, the policyholder's cash value is protected. This means that the policyholder can participate in the upside of the stock market without incurring the risk of losses.

Third, IUL policies offer policyholders access to their cash tax-free via withdrawals and loans. This is because IULs are funded on an after-tax basis, similar to a ROTH IRA, so policyholders can access the money in their account without having to pay taxes or penalties on the withdrawal. This is a HUGE advantage for retirees who are looking to supplement their income, especially for those wanting to retire prior to age 59 1/2.

Fourth, IUL policies offer death benefit protection and living benefit protection. In the event of the policyholder's death, their beneficiaries will receive the death benefit tax-free. If the policy has a living benefits rider (in 2022 most new policies do), the death benefit may be accessed early during the policyholder's life in the event of a chronic or critical illness.

Fifth, IUL policies provide estate planning benefits. The cash value can be used to pay for estate taxes and other expenses. If the policy is purchased and owned by an irrevocable trust, the death benefit may not be included in the grantor's estate.

Sixth, IUL policies can be used to help fund a child's education. The cash value can be used to pay for tuition, room and board, and other related expenses.


Concluding thoughts

Overall, IUL offers several advantages for the wealthy who are looking to reduce their taxes. The tax-deferred growth, the potential for high returns, and tax-free withdrawals and loans make IUL an attractive option for those who want to minimize their tax liability in retirement, and efficiently transfer wealth to their loved ones.