MBR Financial, Inc.
2000 West Loop South
Ste. 1510
Houston, TX 77027

Retirement Planning with Indexed Universal Life Insurance

The cash accumulations of cash value life insurance may be used to supplement other sources of retirement income. Cash value life insurance refers to a wide variety of insurance policies that provide both a death benefit and the potential accumulation of cash value over a period of time. Indexed universal life insurance (IUL) is a type of cash value life insurance with features that make it an appealing choice as a retirement savings vehicle because it offers an index account option that credits interest to cash value based, in part, on the performance of a market index (e.g., S&P 500, Dow Jones Industrial Average, NASDAQ). The amount of interest credited depends on specific policy provisions. Indexing methods are complex and are subject to conditions and limitations, which should be considered carefully before investing.

How does IUL work?

Like typical universal life insurance, after payment of insurance costs and charges, excess IUL premiums are deposited into a cash value account. However, unlike universal life, interest earnings on cash values in an IUL are tied to the performance of a market index. The amount of interest that is credited depends on specific policy provisions and how well the market index performs.

Once an index is identified, the performance of the index is measured over a period of time, called the term. The term can be one year, two years, or many consecutive years, although often the term is one year. If the index increases in value at the end of the term, the amount of the increase or gain that's credited to the IUL policy's cash value is based on a percentage of the gain, called the participation rate. For example, if the IUL has an 80% participation rate, then 80% of the gain in the index will be credited to the cash value, usually subject to a cap.

The cap sets the maximum amount of interest that is applied to the cash value of the IUL. If the cap is 10%, then the most interest credited to the policy's cash value will be no more than 10%. Index gain exceeding the cap is not credited to the cash value.

Cash values may be withdrawn

IUL cash values grow tax deferred, meaning, in most cases, you do not pay income tax on interest credited to cash values within the policy. However, you may be able to access the policy's cash value during your lifetime.

You can take tax-free withdrawals up to your policy basis (premiums paid), and you can take policy loans against the cash value as well. Cash withdrawals may be subject to surrender or withdrawal charges that would reduce the policy's cash value. A fixed or variable interest rate will be charged. Keep in mind, however, that if you take a loan against your cash value, the death benefit available to your survivors will be reduced by the amount of the loan. In addition, policy loans may reduce available cash value and can cause your policy to lapse. Finally, you could face tax consequences if you surrender the policy with an outstanding loan against it. Different tax rules apply to withdrawals and loans from cash values if the policy is a modified endowment contract. In that case, withdrawals and loans are considered made from earnings first, and would be subject to income tax.

Using IUL for retirement

  • Policy cash values are credited with interest based on gains, if any, in a market index.
  • Generally, cash accumulation values of IUL policies are not affected by negative market returns. If the targeted market index loses value during the term, the policy's cash value will not suffer comparable losses, although no interest may be earned.
  • Cash accumulation values grow tax deferred, and may be accessed on a tax-free basis.
  • A tax-free death benefit is available to protect your loved ones from financial uncertainty in the event of your premature death.
  • IUL offers flexibility through the ability to change the amount of death benefit, premium amounts, and payment frequency.

Other factors to consider

IUL cash values may experience little or no gain during periods of negative index returns. And interest rate caps may limit potential upside growth. Also, IUL has many "moving parts" that need to be considered. Policy fees, charges, and costs reduce your cash value. And withdrawals of cash values may cause your policy to lapse if you don't make additional premium payments or there isn't enough cash value to pay the costs of insurance.

Is retirement saving with an IUL policy right for you?

IUL may be an option if:

  • You want permanent cash value life insurance with the associated death benefit
  • You understand that mortality charges and other expenses can decrease your cash value
  • You like the potential of cash accumulation coupled with the opportunity to earn interest based on positive market index returns
  • You intend to keep the policy for a long time (usually at least 10 years) before taking withdrawals from cash values

*Policy guarantees are subject to the claims-paying ability of the insurance issuer.

IMPORTANT DISCLOSURES Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, legal, or retirement advice or recommendations. The information presented here is not specific to any individual's personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2020.