Be aware that:

•  Cap rates on IUL policies are about 3 to 5 times higher than those on index annuities;
•  There are IUL policies which allow you to add a rider that will **guarantee lifetime income;
•  IUL policies if configured properly can generate a tax-free income stream;
•  An IUL may NOT be the right choice for your **guaranteed lifetime income…

Dick and Eric discuss the differences between index annuities and index life insurance; both have become increasingly popular for retirement planning.

**Guarantees, including optional benefits, are backed by the claims-paying ability of the issuer, and may contain limitations, including surrender charges, which may affect policy values. During this segment, Dick and Eric are referring to Fixed Annuities unless otherwise specified.

Indexed Universal Life Insurance Policies: The Perfect Option for Professionals and Business Owners

by Timothy R. Fussell

For a professional such as a doctor, attorney or CPA, the Indexed Universal Life policy is perfect for your retirement needs. Often as a professional, you operate as a P.A. being taxed as a sole proprietor, an S Corporation or a C Corporation, and under the tax codes you are limited to retirement account choices. The SEP IRA, Solo-401k or the UNI-401k, all allow you to save on a tax-deferred basis; but the maximum contribution limit is still the same $49,000.00.

Now let’s explore the IUL (indexed universal life) and why it is a better choice. As a professional of these types, your income level is much higher than average, so you max out your contribution very early in the year. With the IUL, there is no limit on how much money you can contribute—the money still grows tax-deferred, but with a several advantages.

Now comes the great part! In the event of a business need, the money in your tax-deferred accumulation account can be used, through interest-free loans, for the purchase of new equipment, to expand the practice, or just to carry you through a tough time. At retirement the money is paid to you in the form of tax-free loans against your account value. The income would be a lifetime income with of loss in a down market, and at the end of the income, your death, the face amount of the life insurance policy would still go to your heirs as a tax-free death benefit. The tax-free death benefit would, at any time, be the security to your family that their lifestyle would continue in the same manner to which they had become accustomed—a **guarantee the retirement account cannot promise. If, through a consultation with your insurance professional, it is determined that your life insurance needs exceed the desired amount of contribution in the IUL, a term life insurance policy can be added to meet your life insurance needs at a lower cost.

A business owner has many of the same needs but also faces many different challenges. The IUL is even more exciting in these cases. All of the benefits listed above still apply to the business owner, but if you are an S Corporation, you could have the option of making the premium contributions as a draw against the profits of the corporation and avoid the self-employment tax/social security tax, which could add to the benefits of the IUL.  That alone is a 13.3% tax savings!

To a business owner with a partner or partners, another issue is presented that makes an IUL a perfect choice. Should a partner/partners die, you would have the need for a Buy-Sell Agreement to determine the value of the buy-out of the deceased partner/partners. The best way to fund the buy-sell agreement is through life insurance policies. The buy-sell agreement would either be a cross purchase buy-sell or a stock purchase buy-sell. These differ based on your corporate structure. Your insurance professional should have a working knowledge of the two types of agreements and work with your CPA and attorney to make sure they are set up correctly. [Read more…]

Annuity Guys® Video Transcript:

Eric: Today, we’re examining indexed universal life and how it would compare to perhaps a hybrid annuity or annuities in general.

Dick: Right. First of all, let’s say, “Thank you,” Eric, to Steve.

Eric: Steve up in Wisconsin for submitting his question. Please continue to submit your questions, and we’ll examine them as the weeks go on. So for those of you that submitted questions.

Dick: We’ve got some already.

Eric: We’ve got some in the hopper, and those of you that have questions, keep them coming.

Dick: Today, in comparing indexed universal life and it’s also called equity indexed universal life or EIUL, but the more technical, correct term would be IUL, very safety-oriented product. It’s a life insurance product and there are a lot of good comparisons we can do with that and annuities, so why don’t we just start off talking about the life insurance part, the IUL.

Eric: We don’t talk about life insurance too much here, so let’s talk about one, why someone would even compare in the sense of I’m going to think of it in terms of, if I’m not going to select an annuity for retirement income would I select an equity or in this case, an indexed universal life policy.

Dick: Or if I was looking at growth compared to… Well, I’m just saying if I was comparing the two for growth. Okay, maybe I’m getting– go ahead.

Eric: You’re good at jumping ahead.

Dick: Jumping ahead of you.

Eric: Darn it. So what we want is trying to grow the policy to the largest amount, so that we can use it for a retirement supplement. Because, really here we are talking about the living benefits of the IUL, in this case, being able to use it as a supplement for retirement. Now what it has is the ability to have a double digit cap compared to with the low, single digit caps, of today on the annuity world or on the hybrid annuity.

Dick: And that’s large Eric, because when we look at the caps on most annuities, the fixed index annuities which are referred to as the hybrid annuity, the caps are down below 5.0%. Some substantially down in the 2.0-2.5-3.0% range, so when we start talking about the IUL, now we’re looking at 10-12-15% caps, even.

Eric: Right, so we have growth potential.

Dick: Potential, right.

Eric: Because here we’re talking about index games, there is not that **guaranteed rollup side. So on the hybrid annuity side you’ve got those income riders that have some of those **guarantees.

Dick: Contractual **guarantees for the future income.

Eric: So that is the one comparison on the caps side. Now what are we going to use for withdrawals on the life insurance side? How are we going to get money out of this?

Dick: Well, if we take actual withdrawals, we’re going to pay taxes.

Eric: Taxes?

Dick: So we don’t want to take withdrawals.

Eric: Well, then why would we even consider this?

Dick: And when we compare it with an annuity, when you take withdrawals out of an annuity, you pay taxes. But there is a really nice aspect to the IUL, and that is you can borrow out of it, and it is just like the old, traditional whole life policies you can borrow out of it and not pay taxes on it and IRS has allowed that. On borrowed money, any time you borrow money from a bank or anywhere, there is no tax paid on borrowed money.

Eric: Now do I have to pay this money back?

Dick: Actually, technically you do.

Eric: But when do you have to pay it back?

Dick: Through your death benefit.

Eric: And that’s the key element here. It’s really part of the death benefit and that’s what makes it, basically you’re going to pay it off at some point in time.

Dick: Right.

Eric: Those dollars that you’ve accrued are going to get paid back at the time, when you’re gone basically, as that death benefit is disbursed.

Dick: Right. One of the things that I want to bring out is that, if you want to use the IUL folks, you cannot use your qualified funds or your IRA money, unless you’re willing to just go ahead and pay the tax on it and move it over. Then you have to do a real analysis on how that might…

Eric: Just as a reminder neither of us are accountants nor tax professionals so we would advise you to consult your tax professional when it comes.

Dick: Although, we work with this every day and constantly talk about the taxes.

Eric: So now is the government going to come in and take my tax benefit away?

Dick: Well, that is a question we are frequently asked. I am asked that on The Raw, I’m asked that on life insurance or life insurance that’s being used in more of a retirement account type situation, and the answer to that is, it can happen. It could happen. However, if we go back and look at other times where Congress has stepped in or the government…

Eric: Screwed us?

Dick: … took advantage of us? Typically, they have grandfathered us, so that if we are in a situation where, in good faith…

Eric: Great grandfather’s covered, I get screwed.

Dick: So if we operated in good faith and set this up, and did it under the current tax provisions and laws and by the way, this is the IRC, Internal Revenue Code 7702 provision same type of thing that the IRC 401k, same area that comes from, it’s the 7702. So if you see the 7702 Plan that’s what they’re talking about.

Eric: He wants to be an accountant.

Dick: It’s very legitimate, it’s very real and it works and a lot of professional people use this, because they can put large amounts of money in. They keep their principal safe. They lock in their gains. They’ve got annual reset. There are some wonderful things about it, but Eric, who’s it going to work best for and at what stage?

Eric: You’ve got to be in your accumulation stage it’s probably the easiest way. So young professionals perhaps, I’ve heard it called a Big Boy Roth, because you can dump oodles and oodles of money into it and let it grow. There is not a limitation to the contribution amount. Now they have to be dialed in the right way and that’s one of the things that…

Dick: A little secret.

Eric: Yeah, strategy wise, usually you have the smallest amount of death benefit that you can have on life insurance.

Dick: Which means you pay the least amount for insurance and the agent makes the least amount on…

Eric: … commission. So you can see how there could be a confliction amongst the person that might be trying to talk to you about this, so usually we see only larger clients.

Dick: I like that word, though, Eric, confliction

Eric: Confliction. I’ve got an ointment that takes care of that.

Dick: Let’s trademark that.

Eric: So yes when your conflicted agent comes in and says…

Dick: Yes, we need to make sure you’ve got plenty of life insurance. Let’s not go too far on this, because there are times when a lot of life insurance is good for heirs and different things. But the way to make an IUL really work well, and again back that original question I had posed and that was, what stage, and I am just going to go ahead and answer it.

Eric: Say 15 to 20 years.

Dick: Yeah, 40 to 50-years-old, that you can really let it sit.

Eric: You’re 15 to 20 years from retirement. You have to have at least that amount of time really, for it to really function well and that’s the key, I think. Because at that point in time, it starts to get the extra dividends, the extra pieces, the extra credits that can make it really hum. Then you can have a rider on there that has a loan provision for life, so you can treat it very much like an annuity, but you have to have the forethought to have done these 15-20 years before retirement.

Dick: Correct.

Eric: So if they haven’t done that, income **guarantee-wise.

Dick: It’s really based more on potential. Yes, now let’s talk briefly, because this is a long video, let’s talk briefly about the annuity and why the annuity would have certain aspects…

Eric: Advantages?

Dick: … and advantages over the IUL, because the IUL is pretty cool the way it works.

Eric: They’re very cool. I love them. I would say **guarantees though, especially **guaranteed lifetime income, for someone that’s nearing or close to retirement is the key. I don’t want to say it’s the singular piece, but it is the first and foremost.

Dick: Because with the IUL I have to have potential for growth, I have the potential for growth, and I have to get the growth through that potential, but with the annuity I have a contractual **guarantee.

Eric: Yes, and that’s the key. We’ve talked about the hybrid aspect, you also have other annuities such as immediate annuities, where you’re going to have payouts of your principal plus, **guaranteed for life. Now the insurance aspect without a rider, you could actually run out of basically, enough account value, because you have to keep the insurance in place long enough to die, because if you don’t die with any insurance left, you haven’t paid off your loans.

Dick: And probably, Eric the best advice that we can give you, beyond the general information we’ve just given you is work with an adviser who really understands how to compare these two, and, maybe it’s not one or the other, maybe it’s some of both.

Eric: Yeah, could be. It depends on your end goal. What do you want these dollars to do for you? So work backwards and work with an expert.

Dick: Steve, thank you for this question, and those of you out there who have questions, we’ve probably caused you in this video to have some more questions. Feel free to send those in to us and we look forward to answering them.

Eric: That’s right. As you can see, we’ll tackle just about any question as long, as it relates somewhat, to our annuities world. Thank you very much.

Dick: Thank you.

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