Two Examples of How IUL Can Provide Tax Free Income in Retirement | Tax Free Income for YOUR Retirement

IUL is an asset class that you could consider as a slice of an overall retirement strategy for you. That has a lot of benefits. There are also some downsides which we’ll cover, but this video is a continuation of our loop video series. L I R P. On the YouTube channel here. So we’re going to go through two examples of how I UL can be used in retirement planning to provide you tax-free income or your children tax free income.

hi, I’m Troy Sharpe, CEO of Oak Harvest Financial Group, CERTIFIED FINANCIAL PLANNER™ Professional (CFP®) and host of the retirement income show. IUL. It stands for indexed universal life insurance. It’s a cash value life insurance policy. The costs are much less than. Because all life insurance has expenses, universal life, specifically indexed universal life.

The costs are a lot less than whole life insurance. They’re more than term insurance, but it’s kind of in the middle. There also, these policies are far more transparent than whole life insurance, which most of you are probably familiar with whole life. Insurance is the one where maybe you got a policy when you were a kid.

A kid had had a $10,000 death benefit and your parents put money into it. I see those all the time sitting with clients, this is a more recent innovation in the life insurance industry. And instead of like whole life insurance, they give you a dividend based on. The profits of the life insurance company, indexed universal life again has less expenses, but the interest credited is based on the positive movement of an external index, like the S and P 500.

So some of the basic parameters. When the market goes up with an IUL policy, your account value can increase in value as well, but you’re 100% protected from market losses. So the money that you put into these strategies, if the market tanks, your principal’s protected, it will never go down because of the market.

When the market rebounds, you start tracking the market again from where you left. Typically every 12 months, the gains that you’ve made lock in this is not designed to explain exactly how UL policies work. There are a lot of pros. There are some cons you need to be aware of and work with a professional and not just any professional, somebody who really understands the mechanisms inside the various policies out there and how to structure these.

There are several different ways to structure them and you need to optimize your structure from the outset to ensure you have the best potential to receive tax-free income down there. So the IRS regulates these types of policies. They have some certain rules that to ensure your income is tax-free. You have to follow the rules.

It is a life insurance policy. And the primary reason we buy life insurance is because we want the family protection. We either want the tax-free death benefit to go to our heirs. If something should happen to us, or we get the death benefit to help pay taxes whenever we’re gone. So our family can keep more money of what we’ve earned over the course of our lives.

We’re going to put a link in the description down below. Where you can schedule a phone conference with one of us or a zoom meeting with one of us. If you want us to go through your situation and see if something like this fits for your retirement or for your kids, if you want to gift money out of your estate.

So you’re improving your situation while also providing them the tax free death benefit that comes along for family protection, as well as the potential to grow tax free and take income out tax free. So click on that. If you want to set up a phone or is it. So, this is just an example. This video is not designed to go through the complete ins and outs of how these work.

This is a hypothetical example. I just want to introduce you to the concept of how these tools can be added as a part of a much broader retirement strategy. I typically say you don’t want to, to, to contribute more than about five to 10% of your overall. Liquid net worth to the annual premiums being paid inside these policies.

If you have a million dollars liquid, you really don’t want to go over the $50,000 a year. Mark, probably 25,000 a year, 15,000 a year. Something in that range is probably more appropriate because this is just a slice. It’s not your full retirement plan, but the benefits can be immense. So. First, this is an example.

We’re going to look at a 55 year old male here that makes $25,000 per year annual contribution into this policy for 10 years until they’re age 65. So the initial tax-free death benefit is $414,000. When structuring these policies, you have three death benefit options typically to choose from option a option B option.

I’m not going to get into the differences there, but not only do you have to get the correct death benefit from the outset. A lot of times down the road, you have to switch which death benefit option you have in order to reduce the internal expenses of the policy, thereby maximizing the cash value growth and tax-free income potential.

So again, these are not set it and forget it. These are not simple strategies. Overall the mechanisms inside them are fairly complex and you need to monitor them and you need a professional who knows what they’re doing to monitor them, but 25,000 for 10 years. So we’re going to put 250,000 into this. The immediate day one death benefit is 414,000.

We have a chart here that shows a six and a half percent non-guaranteed rate and a 4% non-guaranteed rate. So. This is one of my favorite policy designs out there. There are a couple that are very viable for your retirement. The six and a half is a very achievable. It’s not guaranteed, obviously says that right here, but from my experience, it is a very achievable rate of return for two reasons.

One, the index that we’re tracking here, um, and the participation rate, the participation rate typically is 140, 150, 160%. So very high participation rates, but this policy also gives you four opportunities. To select each year, if we get a bonus, a fully guaranteed bonus to the amount of interest that we’ve earned.

So again, I’m going, I mean, this is getting a bit complex, but all I want to do is introduce you to the concept and you can look at some of the numbers here. So this is in my opinion, a very. A rate of return expectation here. Now there are policy expenses which will reduce the cash value inside the policy, but the rate of return, very, very achievable.

If we were to get this consistently, this is a reasonable expectation of the amount of tax-free income that you would receive for a 20 year period. So from age 65 to 85. So if you just take the no bonus option, which in this particular policy, nobody would have. It doesn’t make any sense because the 15% bonus is fully guaranteed and there’s no extra expense for it, but it just assumed somewhere between 30 2050 1000 per year tax-free income.

This is for a 20 year period. So 51,000 for 20 years, that’s a million dollars in tax-free income. We’ve only put in about two 50. Down here. If we take this lesser option, it’s 640,000 of tax-free income over a 20 year period. Again, a more realistic expectation would be somewhere around here, 43. Cause even if we get under-performance and we want to assume, Hey, what happens if the markets don’t perform, um, over the next 10, 20 years, let’s be sensitive here to the.

Possibility. So let’s say it’s $40,000 a year for 20 years. Completely tax-free income that will receive that’s $800,000 in tax-free income. All the while the money inside here is 100% protected from creditors. Protect it from loss. And your cash value is growing in a tax-free manner as well. If you pass away, your tax-free death benefit is always higher than your cash value.

This is what makes it life insurance. So there’s a corridor there between your cash value and the death benefit. The death benefit is 100%. Tax-free the income is 100% tax. We have an environment in this country where taxes are probably going up over the next 10, 20, 25, 30 years, looking at something like this that can provide asset protection, death benefit protection for your family and tax-free income for you throughout retirement is a sound tool to explore and to look at and to consider adding to a slice of the overall retirement plan.

Now, if we look here, What I’ve done is many of you are going to have required minimum distributions that you don’t need. Many of you have assets that we need to start gifting to our children or grandchildren to get out of our estate because the estate tax laws are going to change under the new presidential administration.

So what I’ve done here is I’ve run an example for someone who’s 35 years old, maybe a son or a daughter. And we’re looking at putting 10,000 a year for 20 years into this policy for them. Okay. So this will provide their family death benefit protection. Maybe they have young kids. This will provide asset protection for.

They don’t have to wait until 59 and a half to go in and take this money out if they need it. And it’s, tax-free unlike a 401k or an IRA. So it’s liquid. We can take money out without paying taxes. These policies are much more advantageous for people in their thirties and forties than someone in their sixties or seventies when it comes to cash value accumulation.

The reason is the expenses, because this is life insurance. The expenses are a lot less. So if we look here, we put 10,000 for 20. We gift it to them, which gets it out of our state, gives it to them. But instead of just giving it to them, if we put it into the post. Look at the annual income they could take tax-free from age 65 to 85, somewhere between 58,000 a year to $105,000 a year.

All the while they have that death benefit protection, God forbid, anything happens to them. Their family would receive that tax free death benefit. The structure of these policies is very important. Monitoring these policies moving forward is very important. The only reason you consider something like this is if the primary reason is the death benefit is attractive, that we want money in.

Asset protected growing in a tax-free manner where we can take it out in a tax-free manner. And that death benefit is a primary motivator because we want the family protection. So structure is very important. Um, this is by no means. Um, a full disclosure of everything you need to know about these policies.

They come with illustrations, they come with, um, language that needs to be reviewed with you and your advisor. They are not a good fit for everyone. If you’re not in good health, this is probably not a good idea for you because the expenses would be higher inside these policies. If you want to have a discussion about if index universal life, a strategy like this can compliment what you’re doing or supplement retirement income for you, there’s a link in the description.

You can click that, get time on our calendar. We’ll reach out. Go through the pros and cons and do a financial analysis and help you understand if this fits into the picture for you and your retirement, or maybe for the kids hit that, like button hit that subscribe button and we’ll see you on the next video.