Over the last two years, we have been privileged to assist dozens of clients with setting up part of their income in retirement to be tax-free. For some, we use Roths. For many, we use a combination of Roths and indexed universal life (IUL).
We like IULs a lot, but the first thing we tell clients is that they are complicated. In fact, they are so complicated, that we won’t let a client pull the trigger on them unless we have discussed them at three different meetings.
2. Can I choose how to invest my money?
- Actually, the insurance company makes that decision. Here is how they do it: Let’s say your premium is $1,000 per month. The insurance company takes $950 of that premium and buys an investment that guarantees they will get back $1,000 at the end of the year. That is how they can guarantee that your cash value won’t lose money in a down year. They use the other $50 to buy options — specifically, calls — the right to purchase a particular investment if its price falls within a specific range. In good years, the $50 will provide some extra income — that is how they can get extra rates of returns on the product. In bad years, the options expire as money runs out and there is no extra return for the policy owner.
3. What happens if I can’t make a payment, lose my job, or face some catastrophe?
4. What if Congress changes the tax benefits?
- At this point, I explain that these insurance products used to have even better tax advantages. In those days, the wealthy would put in millions of dollars so they could have tax-free savings account. The IRS got onto this tax strategy and passed a law that limits how much can go into these policies. However, all the lucky people who had been socking money away managed to have their policies grandfathered in and keep their tax benefits.
- Nothing is certain, of course, but I have never even heard of any potential regulations that would impact these, and the only conclusion I can come to is most of Congress must have permanent life insurance.
5. Why aren’t more people doing this? Why haven’t I heard about this?