The life insurance industry has the best IRS-approved retirement savings plan today — and most investors know nothing about it. This retirement savings vehicle is not a pre-tax qualified, 401(k)-type plan, a Roth IRA, an annuity or whole life insurance. It is the financial industry’s No. 1 secret — Indexed Universal Life (IUL).
The ugly truth is that the 401(k) is a lousy idea, a financial flop, a rotten repository for our retirement reserves. The solution: a new type of insurance. Retirement savings, it turns out, are exactly the type of asset for which we need insurance. Insurance protects against risks that can’t be predicted, for instance, when the market collapses and investors can’t afford to recover from it on their own.
People insure nearly every other aspect of their life: their health, their home, their vehicles. Why not protect a safe, comfortable retirement against the risks that can’t be predicted and that investors can’t afford to recover from on their own; and why not cut out the tax man in the process? These are all legal, and totally above board, established life insurance principles. It may sound too good to be true, but it’s just what life insurance is and does. Yet the general public — and even many financial advisors — have absolutely no idea that a tax-free, market-risk-free, gains-locked-in, congressionally-approved solution has been sitting right under their noses for 14 years. Let’s lay out the basic principles of Indexed Universal Life (IUL).
Indexed Universal Life’s basic principles:
1. The money grows tax deferred, access to it is tax free and it does not affect taxation of Social Security. This alone can save thousands of dollars in taxes.
2. It is guaranteed by contract never to lose money due to a market loss. IULs are not tied to the market but are linked to the market by a selected index and all gains (subject to a cap) are locked in.
3. Historical returns, based on actual illustrations from the top carriers going back to the late 1980s, are usually somewhere between 7-9 percent, mean actual interest rates of return.
4. The death benefit is paid out to the beneficiary — tax-free.
5. Many parents use the cash value in the IUL to fund college.
There are many more benefits to the IUL than those listed above.
It looks like odds are good that Indexed Universal Life may offer roughly two to three times the amount of benefits over conventional investments, depending on the actual index returns and the investor’s tax bracket. This is a result of protection of principal against market losses, the indexing and legally cutting out the tax man. This is what Einstein called one of the most powerful forces in the universe: compounding interest.
Sources: Read more: http://www.foxbusiness.com/personal-finance/2012/02/22/legally-cutting-out-tax-man-in-retirement/#ixzz2eOvEEssz Gandel, Stephen (2009, October 9). Why It’s Time to Retire the 401(k). TIME. Retrieved from http://www.time.com/time/magazine/article/0,9171,1929233,00.html.
Photo: It can be challenging to find effective ways to save for retirement.