How do IUL’s stack up? It’s time for an IRA vs IUL | Reading showdown!

Most people planning for retirement believe that 401(k) and IRA plans are the best strategies for retirement. I get it, they’re popular. But in the last 20 years, we had two major market crashes. Understandably, many working professionals worry about the long-term safety of their money. But with its contribution limits, costly tax implications, and investment options’ exposure to market risk, the IRA can be unseemly for careful savers.

I’ve spoken about Indexed Universal Life (IUL) plans as an alternative to Roth IRA’s in particular however, and how they’re competitive.

But how good or bad an alternative is an IUL, versus an IRA? The answer is, of course, it depends. No one can say for sure, because no one can tell the future of how the market and investments will fare.

I can, however, base projections off of current rates, using myself as an example. Some parameters:

  1. I’m a 40 year old male in relatively good health. For the IUL, I’d expect to get a Preferred Non-Tobacco rating (the second-best rating, not the best).
  2. I’m starting with zero invested in either today, and adding $500/month from now until age 69.
  3. I’m using the current interest rate on a typical IUL product, now at 8.26% EOY. There are no fund management fees.
  4. I’m using an optimistic 7.0% rate of return on a IRA, but subtracting 0.5% for fund management fees.
  5. I’m assuming that markets are steady and not fluctuating, because chaos is hard to model.
  6. And, I’m assuming that taxes will stay at their current rate for someone with an annual income of 100k/year.

Lots of assumptions there, but let’s see where that gets me.

 

IRA vs IUL | Reading: The Results

IUL: $500,579. No taxes taken out, because it’s paid for with after-tax dollars.

IRA before taxes: $630,000. After taxes (25% bracket): $472,500

Those taxes really hurt!

 

Some thoughts to consider:

Taxes: Given current federal fiscal deficits, do you think income taxes are staying where they are or going up?

Early withdrawals: If something happens to me and I need the cash value of the IRA before retirement, I’d pay large tax penalties from the IRA. No penalty for early withdrawals from an IUL.

Probate: If I were to die young with an IRA, my investment would probably be stuck in probate.

Life Insurance: If I were to die young with an IUL, my family would get the death benefit almost immediately. My death benefit at this level would start at $411,000, and go up steadily as I approach my golden years.

 

I Wish You’d Had Life Insurance …

We all have stories of life insurance (or lack of it) effects us when a loved one dies. For a colleague of mine, it was about five years ago, living out West with her husband and teenage son. One day, they received a call that their son had died in a car accident – he’d fallen asleep at the wheel.

Her husband (the son’s step-father), had to work the day of the funeral in order to scrape together the money to pay for the funeral.

I can’t imagine that. They couldn’t afford to grieve.

Six months later, tragedy struck my friend’s family again. Her husband died unexpectedly, again with no life insurance. With no way to cover the funeral or the mortgage any longer, she lost the house.

That’s right, within a year, she lost her son, her husband, and her house. She had no way to survive, so she had to move across the country and move in with relatives in North Carolina. It took her 3 years to get back on her feet.


My personal story is about what could happen to my family if something happens to me.

My first career was a s a biomedical scientist, but from about 2010 to 2015, I was living in an area where there weren’t jobs in my field, and I was broke. I had a wife and two young children who depended on me, and I was broke. The strain ruined my marriage, and I had to move to earn money to support my children.

I saw what financial problems did to my family, and the people that I loved. It broke my heart. I’m doing better now, but not so much better that I don’t worry about what could happen to them if I wasn’t supporting them financially. It kept me up at night.

Life Insurance (and Health Insurance) helps me sleep better at night.

I spend close to 10% of my income on life and health insurance because I want to sleep better at night. I want to know that:

  1. if I die, the money will still be there to allow my daughters to attend college.
  2. if I have a heart attack or cancer, I’ll have my medical expenses covered and money to continue supporting my daughters.
  3. I can affordably go to the doctor to make sure that (1) and (2) don’t happen.
  4. and I gain cash value with these plans that allows me to retire one day. I don’t want to have to work until the day I die.

I have three plans to help me do that:

First, I have a fixed indemnity plan as health insurance on myself, as an affordable way to see the doctor if something happens to me.

Second, I have guaranteed universal life plan on myself, with critical and chronic illness benefits, so that if I die, get cancer or can’t work any longer due to illness, I’ll have money to replace my income and (if necessary) bury me with.

And third, I have an IUL that grows interest on the cash value of my life insurance, so I can retire one day.

I have all of this, because I want to sleep better knowing my loved ones will be okay.

Dan @ Rhoads Insurance Group

Reading Roth IRA Alternative | High earners have options for saving for retirement, but income limits mean direct contributions to Roth IRAs generally aren’t among them. This is unfortunate because Roth IRAs offer tax-free earnings growth and withdrawals in retirement — a strong advantage in an economic climate where income tax rates are likely to increase in coming years.

That doesn’t mean you don’t have other options for making your retirement savings plan more tax efficient.

What is a good Reading Roth IRA alternative?

There are very few ways to get tax-free income at retirement. If you’re looking for a Reading Roth IRA alternative, another way is municipal bonds, but you run the risk of losing your money or you’ll get low returns. An excellent way to receive tax-free income is through a policy loan on a life insurance policy, specifically an Indexed Universal Life insurance policy offered by National Agents Alliance.

What is Indexed Universal Life Insurance?

Indexed Universal Life insurance is a permanent life insurance policy that has a “living” benefit in the form of a cash value, in addition to a death benefit that is paid at death. The cash value in your policy earns interest based on either a fixed interest rate, an interest rate that is based on the increase in an equity or bond index or a combination of both. What makes Indexed Universal Life insurance unique is the ability to earn interest based on the movement of an external index (like the S&P 500®). With indexed based interest, you are likely to earn higher interest over time than with a fixed interest rate.

Indexed Universal Life insurance is a great tool for retirement savings because you are able to take advantage of a portion of the gains in the market when an index rises without having to take any of the risk when an index decreases. In other words, your money is at NO market risk! If the index goes down in any given year, you are guaranteed that your cash value will not decrease due to that market loss.

Not only are you able to save money for retirement through the cash value in your Indexed Universal Life insurance policy, if you were to die prematurely, your loved ones will receive the death benefit of the insurance policy federal income tax free. This is where an IUL really is a great Roth IRA alternative. You don’t even have to go through probate.

Why is Tax-Free Retirement using Indexed Universal Life insurance so important?

You can access the money in your cash value through policy loans & that income is federal income tax free! As mentioned earlier, life insurance is one of the very few ways to get access to your money tax free. And, the policy loan (and loan interest, if any) does not have to be paid back as long as the policy remains in force! If the policy loan is not repaid, any unpaid loan balance will be deducted from the death benefit & the remaining death benefit will be paid to your beneficiary when you pass away.

And let’s face it, income tax rates are likely to increase in the future. You can also protect your retirement income savings from decreasing due to potential future income tax rate increases. You don’t have to worry about future income tax rates because your income will be tax-free!