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Here's How IUL Insurance Could Benefit Clients of Almost Any Age

Posted by Partners Advantage on Wed, Jun 03, 2020 @ 12:00 PM

One of the most popular questions I get is “What is the best age for a client to purchase an Indexed Universal Life Insurance policy?” I always respond the same way... 


“It can be advantageous at any age, depending on the situation.” Let's go through the main scenarios where I see Indexed Universal Life insurance policies being used. Please keep in mind that the primary reason to purchase a life insurance product is the death benefit.

For a Child's Future

Using tax free income to fund college is a popular concept. This works best when your child is a full time student who takes loans to pay for school. Since some loans are interest free while your child is in school and payments are deferred until after graduation, you can continue to make premium payments and accumulate cash value in your IUL policy. Once your child graduates, you can take a loan from the policy to pay off the student loans. If you pay back the loan taken from your policy plus any interest, you can restore the death benefit. Any time you take a loan and don't repay it or you make a withdrawal, the death benefit on the life insurance policy is reduced. 

I like to add an additional element where the child takes over the policy and continues to pay the premiums and is building a supplement for their future retirement. There are other great plans for college funding but they have restrictions for how the funds can be used. If the child doesn’t go to college, IUL policies can be used for starting a business or buying a first home. Other plans will penalize you for not using the funds for college.

Retirement Income Planning Strategies

Retirement income strategy planning is a common use of IUL policies. This strategy is for a client who does not feel that they have saved enough money going into retirement, or have failed to prepare a retirement income strategy. I see a lot of financial professionals position IUL as a Roth IRA alternative. Your client could put in more money than a Roth IRA, have no income restrictions, and the policy has a death benefit. Your client would also gain protection from market losses with the floor built into the policy. This is a straight forward way of helping your clients plan for multiple aspects of retirement.

IRA Rescue

I see IUL used as an "IRA Rescue" every now and then. This is when the IUL policy is designed for the client to pay taxes on the seed instead of the harvest. The client could pay taxes now at a potentially lower bracket and lower amount, and then move the money from the IRA to an IUL for tax free income. This can be risky depending on the health of the client and/or the performance of the policy, so it is not recommended for all cases.

Why "Most" Not "All" Ages?

I have listed some of the situations where IUL policies can benefit clients, but there are some times when it doesn’t. If your client is older, the policy may not have enough time to accumulate value or the premiums might be too expensive. Your client may have health issues or may not be insurable. Some clients would prefer to take risks with their money for the chance of a higher return, instead of having the guarantee of a floor when the market is down. IUL policies would not be a fit for these types of clients.

Your Client's Best Interest

I don’t think that an IUL policy is a catch-all, but it is a great supplement to other retirement income strategies. It performs best when a financial professional does a comprehensive assessment and makes sure they are filling in all the cracks in their client's financial picture. When you are looking out for your client's best interest and working to make their retirement income strategies succeed, it is a win-win for both of you.


Tags: IUL (indexed universal life insurance), retirement strategies



This content is for informational and educational purposes only and is not designed, or intended, to be applicable to any person's individual circumstances. It should not be considered as investment advice, nor does it constitute a recommendation that anyone engage in (or refrain from) a particular course of action.

Indexed Universal Life products are not an investment in the “market” or in the applicable index and are subject to all policy fees and charges normally associated with most universal life insurance. Indexed Universal Life is not a retirement vehicle and does not provide a guaranteed income stream in retirement. Both loans and withdrawals from a permanent life insurance policy may be subject to penalties and fees and, along with any accrued loan interest, will reduce the policy's account value and death benefit. Assuming a policy is not a Modified Endowment Contract (MEC), withdrawals are taxed only to the extent that they exceed the policy owner's cost basis in the policy and usually loans are free from current federal taxation. A policy loan could result in tax consequences if the policy lapses or is surrendered while a loan is outstanding. Distributions from MECs are subject to federal income tax to the extent of the gain in the policy and taxable distributions are subject to a 10% additional tax prior to age 59½, with certain exceptions. Product and feature availability may vary by state and broker/dealer.
This information is written in connection with the promotion or marketing of the matters addressed in this material. The information cannot be used or relied upon for the purpose of avoiding IRS penalties. These materials are not intended to provide tax, accounting or legal advice. As with all matters of a tax or legal nature, your clients should consult their own tax or legal counsel for advice.