The Search for the Right Financial Tool for Retirement

In this present, uncertain economy, there is an ongoing search for a financial tool that will provide both security and growth. Depending on one’s financial goal, current financial situation, and risk tolerance, the investor will lean toward security or toward maximum growth (risk).

This explains why some will place their retirement money (or money that will be their retirement nest egg) in a CD, providing miniscule gain—currently averaging .25%, which is one quarter of one percent!, on $100,000 for a 5-year CD (which means your money would be tied up for 5 years for that mini growth). Others are comfortable placing their trust in higher-risk, potentially higher reward ventures, such as IPOs or just placing all of their retirement hope in the market (whether individual mutual funds, stocks, bonds, 401k plans, etc.), while still others take the middle ground between total security and the opportunity for bigger reward (growth).

Tax Savings

Aside from the straddle between security and growth potential, one other major consideration in investment is concerned with tax ramification. In other words, as important as it to not lose your retirement money and to get good growth on your investment, but it is equally important to gain a tax advantage on your gains. After all, you might brag that you had 5% growth on your money, but if taxes on your investment take 2% of your gain, then your net is only 3%. This is why many are drawn to a tax-deferred instrument, such as an annuity or 401k, for examples, which provide a tax advantage by not paying taxes until you take income on your money (with the philosophy that you will be taxed at a lower tax rate at that point).

While a tax-deferred instrument may lower your taxation, what if you could escape paying taxes altogether on your growth? So, what if you get to keep the entire growth of your money? And what if you could combine that amazing feature with the kind of security in which you can’t lose one penny of your principal? That would be an extremely attractive financial instrument!

Indexed Universal Life Insurance (IUL): A Tax-Free Solution

Well, that financial instrument is available—and, with some qualification, it is offered to the average investor. In fact, if you are able to set invest, on average, $200 per month, this financial tool may serve you very well.

This investment tool is an indexed universal life insurance policy. The understanding that the medium used for this investment is life insurance communicates a couple of important factors.

IUL Premium Factors

First, because it is life insurance, an individual looking at this for tax-free income would need to health qualify. That means this instrument works better for one who is healthy; and the healthier one is, the lower will be your cost of life insurance which means that more of your money will be used for growth.

Second, because it is a life insurance instrument, age also plays a factor. The younger a person is when entering this contract, the lower will be the cost of insurance and the more of his or her money will be utilized for growth. In the opinion of this writer, an indexed universal life policy can be a good tool toward retirement for those who enter the policy during ages of 20s – 50s.

That it is a universal life product reveals that it is a permanent life insurance product. Because this plan operates differently from whole life, it is important that your insurance agent direct you to put target premium into your policy rather than minimum premium. Though target premium is higher than minimum premium, it provides for the plan to be funded properly so it doesn’t collapse down the road (as some 1980s universal life policies later did). The money you place into this product beyond the target premium will be your investment money directed toward growth.

IUL: Growth on Your Money without Fear of Loss

As mentioned, the focus of this article is on an indexed universal life policy. “Indexed” refers to how your money is credited or the index into which your money is invested.

Typically, insurance companies that offer indexed universal life plans provide various options where you can direct your money. For example, you can place your money into the Dow Jones, the S&P 500, the Russell 1000, the NASDAQ composite, EURO STOXX 50, etc.; and you can change your index annually, which gives you some freedom on your investment. In addition, you can spread your money around, putting some of it, for example, into a fixed account (of guaranteed growth), some into the S&P 500, and some into EURO STOXX.

However, while you have the opportunity to invest in an index, your money is not in the market. This provides you with protection and security; for, if the index takes a dive, your money won’t dive with it.

Here is the way it works. If, for example, your crediting method is an annual one, the gain will be computed on an annual basis. If the market is up over the course of a year, your money gains (up to a point—see below), but if the market is down over the next year, you lock in your previous gain, and you hold. Then, if the market rises over the next year, you get that gain (up to the cap amount—see below). Essentially, that means that, on the money you put into your policy over and above the cost of life insurance, you will get the gain of the market without any of the loss. That provides you with security, and you won’t have to worry about making up lost ground as do those who invest directly in the market.

The IUL Cap (Ceiling)

Indexed universal life policies have a cap, or ceiling, on the percentage of gain you can be credited in a crediting period (such as a year). A select few plans have a cap as high as 14%, which means that, if the market gains 14% or higher in your crediting period, you will be credited with a 14% gain. That is a big upside for a secure investing tool.

Tax-Free Income

Now we get to the best part of this tool—the tax-free income you can enjoy into your retirement years. As long as you follow the IRS guidelines, after putting ample premium into an indexed universal life policy—over the course of a number of years—you can draw out an income stream which is tax-free! (The IRS requires a certain amount of life insurance per the amount of premium you put into the plan. An experienced insurance agent can help you set up your plan so that it fits these guidelines.) The IRS allows this on non-MEC plans (plans that fit the IRS guidelines), if the income stream is set up as a “loan.” In that case, the IRS recognizes that money as yours, so no taxation occurs.

Some insurance companies provide plans in which, once you begin drawing income from the plan, you are guaranteed that income for life! This means that with the right plan, with the right insurance company, once you begin drawing income on the plan, you can have a tax-free income stream for the rest of your life! How sweet is that!


This writer is not advocating for you to place all of your retirement eggs into one basket, meaning that, in addition to the indexed universal life tool, you should also look at other strategies to prepare for retirement. However, an indexed universal life policy is virtually the only tax-free tool available to the average investor. So, if you are in your 20s – 50s, are healthy, and are looking for a financial tool that will provide you with security, good growth on your money, with a tax-free income benefit, an indexed universal life insurance policy may just be what you have been searching for. If so, explore this possibility with an experienced, trustworthy agent who will be able to answer your questions.

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