frequently asked questions

This is probably the most commonly asked question because we all know the old saying “Anything that sounds too good to be true, probably isn’t”. The IUL was specifically designed as a retirement savings alternative. Since people keep these policies for life, with less than a 2% cancellation rate, the insurance company can invest in safe and long term options, yet will still credit your policy based on the S&P 500. Your money isn’t necessarily invested in the S&P, but that is what is being used as the gauge for growth. This is what also allows you to NEVER take a loss, regardless of what the market is doing. You do pay a fee for the life insurance, but this amount is kept to the bare minimum allowed by the IRS, leaving you with the maximum amount of money working on tax-free growth. The benefit to paying the fee for the life insurance? Life insurance! You also will receive long term care insurance to protect you in the unfortunate event that you need it. All of these things, with the addition of the tax benefits will give you a consistent retirement income, comfort throughout your retirement years and peace of mind knowing your family will be taken care of after you are gone.

Section 72(e) and 7702 of the Internal Revenue Code states the accumulation of cash inside a permanent life insurance contract is tax advantaged. Not only can the cash value accumulate tax-free, but the cash can also be accessed tax-free.

There could be several reasons why you have never heard of an IUL so let’s touch on a few of the most common but first it’s important to understand that IULs have been around since 1995 and are now the fastest growing alternative retirement savings plan available and are growing by around 40% each year. So, chances are you’re going to be hearing a lot more about IUL in the near future.

Most Americans talk finances with two people, their CPA and/or their Money Manager. Most CPAs have never heard of an IUL. We do workshops for CPAs to educate them on the benefits of the IUL so they can share the benefits with their clients. At the start of each workshop we ask the question “Who is familiar with an IUL” less than 2% of the CPAs raise their hands.

Money Managers don’t like to talk about IULs for a couple of reasons. First, most money managers are not licensed to sell IULs. In other words, the guy or gal that sells you your IRA can’t, buy law sell you an IUL and if they can’t sell it, they can’t make money on it. End of story. Secondly, your money managers motivation is to get you signed up for an IRA or 401(k) and then make money on you for life, year after year after year as your investment grows.

We are finding that fewer employers are matching contributions these days, but if your employer is matching your contribution then take it! It’s hard to beat free money! If you are contributing more than your employer’s match, you may want to consider diverting that extra money to the IUL to gain all the advantages the IUL has to offer.

The IUL was engineered to mimic the Roth IRA when it comes to tax free, distribution but the similarities end there. With the Roth, it’s all about restrictions! Let’s start with contribution limits. Your total contributions to all of your traditional and Roth IRAs cannot be more than $5,500 ($6,500 if you’re age 50 or older). Next, we have the income limits that prevent you from contributing money to a Roth – $133,000 if you are single and $196,000 for married couples. Early withdrawal penalties prevent you from touching your money before 59 ½, along with the 5-year rule or you will pay a 10% penalty plus your normal income tax rate. Besides all the restrictions placed on traditional IRA’s and the Roth, you still have to deal with market volatility and the devastating high fees. The IUL doesn’t suffer from these restrictions, your money is protected from negative returns in the market with a zero-floor guarantee and over your lifetime the fees in the IUL are a fraction of what they will be in the Roth account.

IUL’s cost the federal government billions of dollars each year so they are an ever-growing target for a revenue hungry Uncle Sam. In the past, the government has tried and failed to change the rules protecting the tax advantages of life insurance. As with most contracts, changes to current laws would not affect contracts already in place. This is called the Grandfather Clause, which is designed to protect consumers from adverse effects.

We cover this point extensively with each of our clients and use the “Seeds and Harvest” analogy to help explain the problem with deferring taxes. Let’s say you are a farmer. Would you rather pay taxes on the small sack of seeds when you purchase them in the spring or would you rather pay taxes on your entire harvest in the fall? Let’s do the math. If you bought $1,000 worth of seeds and were taxed 8%, you’d pay $80. If you planted those seeds and paid the same 8% tax on a $50,000 harvest, you’d pay $4,000 in taxes. The IRS wants you to think that your qualified plan is the best way to save for your retirement. They induce you to max out your plan by giving you tax breaks now and allowing your money to grow tax deferred over the years. Which inherently means that it will be taxed at some point in the future. Guess when that point is? That’s right, when you retire and need the money the most. You won’t be working, tax rates will most likely be higher and you won’t have any IRS friendly deductions for kids or mortgage interest. Essentially, you’ll be paying a huge percentage of your retirement to the IRS in taxes.

Simply fill out the form here click or call Rocket Retire at 844-321-3211 to receive your free, no obligation, retirement plan comparison and guaranteed illustration.

 

Ed Slott

“IRA Expert” 30 minute presentation

Ed Slott was named “The Best” source for IRA advice by The Wall Street Journal.

He is a nationally recognized professional speaker and has starred in several nationally aired public television specials, including his most recent, “Retire Safe & Secure! with Ed Slott” (2018).

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Disclaimer: Information and/or material provided on this site are meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice in any way, shape or form. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary, therefore the information should be relied upon when coordinated with individual professional advice. Past performance is no guarantee of future results. We are not securities licensed and therefore cannot sell or provide securities related advice. Diversification does not ensure against loss.