7 Reasons Why Every Retirement Plan should include Indexed Universal Life (IUL) Insurance
A 50% loss in the S&P 500 occurred from late 2007 to March 2009. Trillions of US$ were wiped out. It was the biggest loss since the Great Depression of 1929.
Astonishingly, some investors remained insulated from this financial carnage, safeguarding their wealth through the security of indexed universal life insurance (ILU). Policyholders were unaffected by the mass sell-off of global equity markets.
We often get asked, 'Who should buy IUL insurance?' Our research shows that indexed universal life insurance is particularly beneficial for high net worth clients as a retirement planning strategy.
Definition | Indexed universal life insurance (IUL) is a form of permanent life insurance. Life insurance premiums fund a cash account linked to stock market returns. The remaining premium goes toward life insurance.
Let's find out how this works.
1. Zero Floor
Index universal life policies have a zero-floor guarantee from the insurer. It's this guarantee that provides value to policyholders during stock market falls.
Retirees can stay invested in the stock market for its growth potential. But their capital is protected. So an equity-linked life insurance policy protects your wealth with its zero floor. And each year, the floor is reset.
If the S&P fell from 1,300 to 670 points in a year, 670 would be the new starting level for growth next year. IUL policies do not have a high watermark. In other words, they don't have to reach the previous high point of the market.
To put that zero floor into context here are some of the headlines from one of biggest market crashes of all time. But, you could have ignored them if you were invested in an indexed universal life policy.
The biggest annual drop in the Dow Jones Industrial (DJI) Index was -52.67%.
4 is the most consecutive years of losses in the US stock market.
Scary times for many investors, but not those invested in an indexed universal life policy.
2. Lower Investment Risk
The zero floor in an indexed universal life insurance policy reduces sequence return risk. Most investors have never heard of this type of risk. But this is one of the biggest investments risks around for those approaching or in retirement.
Here's a definition of sequential return risk.
Definition “the danger that the timing of withdrawals from a retirement account will have a negative impact on the overall rate of return available” ~ Investopedia.com
Minimising this risk can be critical to your financial health in retirement.
It has taken you years to save for retirement. The last thing you want to do is return to work to repair the financial damage of a stock market crash.
After using IUL as part of retirement portfolios, we have found that it dramatically reduces the sequence return risk.
But it gets better.
Investors can turn to their IUL policy to start taking withdrawals as income.
Because your IUL hasn't suffered any stock market losses.
It means investors can wait for their investment portfolios to recover their losses. When the markets have rebounded, income can start to flow again.
For those wondering 'who should buy IUL insurance?', consider this: by investing in an indexed universal life policy, you're guaranteed never to lose money when stock markets drop.
That's worth repeating and in bold,
With indexed universal life insurance, you'll never lose money when the stock market falls. And that's guaranteed, for the rest of your life.
Do you own any other investments that guarantee you'll never lose money for the rest of your life?
4. Guaranteed Returns
When stock markets fall, you get a guaranteed credit of 1% to 2% every year in your indexed universal life policy.
5. Stock Market Growth
Investors know that stock markets offer the best returns to long-term investors.
But those who have been through a market crash know how alarming it can be.
It could take several years for you to recover your losses before you make any gains. And if you are taking an income from your investment portfolio, the problem will only get worse.
The combined losses of a portfolio value drop and income withdrawals can be distressing. But investors can turn to their IUL policy to start taking withdrawals as income.
Because the IUL hasn't suffered any stock market losses.
Financial Planning Point| Invest in indexed universal life insurance policy (IUL) as part of your portfolio asset allocation. When markets drop, use the IUL to withdraw income. You should leave your existing portfolio invested and wait for its value to recover.
Annual Reset Your policy's index starting point will reset every year. If markets had fallen, you would get zero for that year. But, if markets rise the following year, you will have the benefit of that growth up to the annual cap.
Annual Cap The most used benchmark indices for index universal life policies are the S&P 500, Hang Seng and Eurostoxx.
When the index you are tracking makes gains, you get all those gains up to an annual cap. Different life insurance companies have different growth cap rates. Caps between 8% and 10% are common in international universal life policies.
6. Cash on Demand
Cash is king. Investors hold cash for liquidity. The trouble with cash is you don't earn much interest if any. Returns are poor. Especially over a long retirement. But what if you could stay invested in the stock market, but make a cash withdrawal any time you needed it? Indexed universal life insurance gives you this opportunity. You can tap the surrender value of your policy for cash when you need it. Also, if you need to borrow funds to make purchases, you can also do so with your own policy.
7. Estate Planning
When retirement ends, you can leave a tax-free cash lump sum to your beneficiaries. After all, this is a life insurance policy, not just a retirement solution.
The death benefit will repay the wealth you invested and the withdrawals you have made. Still leaving a large cash lump sum for the next in line.
A 50-year-old non-smoking man invests $1.8m in an equity index life policy for $1.8m in premium.
He retires and starts taking 5% withdrawals from his policy. After 20 years, he's had all his money back ($1.8m). And he still has investment growth left in his policy, based on returns of the S&P 500.
And added to that, he could still leave his family with a tax-free payment of around $5m.
Do you know any other investment that offers this type of return?
Conclusion In conclusion, answering the question 'who should buy IUL insurance?' - indexed universal life insurance emerges as a powerful solution, especially for individuals seeking secure retirement planning. It:
Provides 5% withdrawals
IUL lowers a client's investment risk.
Most IUL policies never suffers stock market losses.
Complements an existing investment portfolio income and growth strategy.
Provides a large tax-free lump to pass onto the next generation.