?Life Insurance is the biggest benefit in the IRS tax code because the money comes out tax-free and there is no limit to this tax break. Life Insurance is the best way to leverage money and too, the single best way to leverage the tax code to build real wealth that is free and clear of taxes. Tax-Free money, wow.? Ed Slott, America’s IRA Expert.
Hi my name is Mel Samick, I want to show you why an IUL is a unique financial vehicle that can help build, sustain, and transfer wealth in the most tax efficient manner.
I am going to be speaking about a hot new concept, Index Universal Life versus the Roth IRA, and where you should place your money.
It’s my goal to educate you on the differences and the similarities between these two vehicles, and to introduce IUL as a Roth alternative for all wage earners to help build, sustain, and transfer wealth in the most tax efficient manner.
So, the question remains, which one is best for you?
That question relies on a couple of different factors, your age, your health, your savings ability, and your annual income.
Because these two vehicles serve two different purposes, let’s first begin with some of the similarities.
Similarities
Let’s take this to the board, and as you can see, the Roth IRA and the IUL are both funded from after-tax proceeds.
We like to say that the tax was paid on the seed compared to the harvest.
Both grow tax-deferred, and both can be accessed tax-free.
There is no required minimum distribution ages, so you can delay past seventy and a half, and the money that you put into the policy can be accessed pretty much at any point.
Differences
Now, let’s talk about some of the differences.
An IUL is a perfect dual-purpose strategy for those high income earning individuals.
An engineer, for example, who is looking to maximize His/her tax-free retirement income, and also have that insurance component, just in case of an early death, if you die to soon the tax-free life insurance goes to your heirs. This also fulfills the saving plan for our loved ones.
One of the first items on this board is ?Market Protection?. You’ll notice, IULs are not invested directly into the market.
It’s what we call indexing, where the insurance carrier is allowing you to participate in market equity-based returns, but not participate in the volatility and the downside risk.
How are they able to do that? Through the use of indexing, this is where the insurance carrier is going to purchase options on the open market which are tied to the index that you’ve chosen.
One year later, they’ll call on that option, if that value is higher, they credit your policy accordingly. If the market is negative, they let the option expire.
It’s very important that these are fixed contracts, and are able to earn equity-based returns without risking that principle, I will touch upon this a little later.
Also, keep in mind that there are no contribution limits.
This is huge for those ultra high net worth clients (earnings in excess of $193,000), these are individuals that have been phased out from a Roth IRA.
The one caveat to the funding of an IUL is it can only be funded over a structured period of time. Like everything, there are exceptions.
We structure these policies because we don?t want to lose all the tax free benefits that we spoke about earlier.
Next on the board is ?Principal Protection?, this is market protection.
The insurance carrier’s going to receive 95% of your premium, put that into the general portfolio, which is composed of highly-graded AAA investment bonds. The other 5% goes towards the purchase of options.
At the end of each year, your money will have grown back to your original money plus you will receive any positive returns from the insurance company exercising the positive options.
Keep that in mind. Your nest egg money will always be safe.
The next item on the board is ?Favorable access to cash value?, this is huge. Essentially, you’re able to be your own bank.
The wealthy understand it, and you should too, where you’re able to take out loans from your policy as it’s still participating tied to the index.
So, if we’re being charged 5% and we’re earning 7%, we’re able to create that net positive gain of 2%.
This is where we are able to create that sustainable income stream that will you will never outlive.
The final item on the board is ?Tax free survivor benefit?. The question is, would you rather leave your money to your family or with the IRS?
?In addition to this, this is a great way to protect you from future estate tax hikes. So, keep that in mind.
Let’s now look at the white board and discuss the Roth IRA. What purpose is this?
This is more of a single purpose.
This is for families earning less than $193,000 per year, Roth?s are a great tool for middle-class income earners who are looking for retirement planning.
They anticipate the tax rates are going to be higher in the future. Many are looking to stash away $7,000 or less a year and hopefully augment tax free money in retirement.
On the white board for the Roth side first up is ?Market Exposure?. Most people that? save with Roth?s use Mutual Funds for investing. Unlike indexing, you’re tied to the volatility in the market.
You’re tied to those stock market crashes, which typically occur every seven years.
You might have to stomach Market losses from time to time, but if you are a long term investor it could be a good opportunity for you.
Next on the white board is ?Contribution Limits?. This is where it becomes a little bit concerning.
Depending on your age, you can only contribute up to a maximum amount. If you’re under age 50, it’s $6,000, and if you’re above age 50, you can actually increase that to $7,000.
The maximum contribution limits make it hard to create wealth in a Roth. It will limit how much money you can save in this Roth for your retirement.
This is one reason an IUL is a great alternative plan for saving for retirement.
Next on the white board is ?Principal Risk Exposure?, unlike that insurance carriers general account yield you invest in the market, that’s 100% exposed to the ups and down, as you know.
Annual income limits, there’s discrimination with the IRS, they think that if you make over a certain amount of money, for example, if your single, you can?t earn over $122,000, if you want to fund a Roth.
If you’re married it’s $193,000, this is where you begin to get phased out from contributing to a Roth IRA.
If you make a good living that leaves you without a way to accumulate, grow and access your tax-free money in retirement.
Typically, most folks fund a 401(k) the money is tax deferred but upon taking the money out of the 401 it becomes 100% taxable.
The IUL can be a great solution for you. Tax deferred growth, tax free withdrawal (policy loans) and the tax free death benefit.
No early withdrawal penalty, you can access your money at all time periods of your life. You won?t have to wait until age fifty-nine and a half to access your funds if you need them.
Real-Life Scenario
We walked through some of the similarities and differences. Let’s talk about a real-life example.
I’m going to show you how an IUL would compare to a Roth IRA, assuming the same premium, the same interest rate, and the same income distribution schedule.
Let’s get into that now.
At age 50, he’s in great health, he’s an engineer, and for apples-apples purposes, I took the $7,000 Roth IRA annual contribution limit, and I assume that both inside a Roth and inside an IUL.
What you’ll notice here is that the day one death benefit, although we’re not structuring these for death benefit, there is that insurance component that they’ll have access to if they do pass away, and that’s $130,000.
That death benefit for the Roth is essentially just the cost basis they put into the policy.
From death benefit features the IUL wins.
Beginning at age 70 there is still about $30,000 to $40,000 more that your heirs would receive compared to that Roth IRA.
Which is again, built in with the premium that you’ve put in and any earnings on top of that.
Beginning at age 70 we begin taking tax-free income. I am taking the same income distribution from both accounts, we start drawing out $22,359 tax free yearly.
But the question is, how long are we able to take out that income and create that sustainable income stream that we will never outlive?
Looking again at the white board above you’ll notice the line below the income we took out, at age 95, we collect far more, a little over $200,000 more of cumulative tax-free income because of that favorable way of accessing the cash value.
What you’ll notice here is that a Roth IRA can’t keep up with the income stream and actually drains out, in this example, at age 84.
Lastly, net of any loans inside the life insurance contract at life expectancy, age 95, how much can we leave to our heirs as a thank you? $96,407.
The Roth was out of money at age 84, there’s zero tied to the account.
In this example,? the IUL death benefit is $96,000, we can pass this onto our heirs tax-free and probate-free.
Hopefully, that gives you a good example.
Now, keep in mind that you can fund a lot more into this IUL for those high-income earners, so you don’t have that cap potential.
Hopefully, you took away some similarities, some differences. You saw a real-life example.
I’m going to leave you with a quote from America’s IRA tax expert Ed Slott. You may have heard of him.
He said, “Life insurance is the biggest benefit in the IRS tax code and is the best way to leverage money and build wealth. Money comes out tax-free, and there is no limit to this tax break.”
I want to leave you with this idea that an IUL could be a great alternative to all wage earners who are looking to supplement their retirement income.
If you would like to learn more about this idea I am happy to meet with you. You can either reach me by phone at 888-839-3536 or e-mail me at MelSamick@msn.com.
Thanks for reading my blog.
Mel Samick