The Power of IUL
I have been in the business for 34 years, so to say that I have seen a lot would be a dramatic understatement! It also seems that with any financial change, it’s imperative to stay informed, up-to-date on all the latest terms, investment ideas, taxes, current market climate, and so on. Frankly, for me, this unpredictability keeps the business very interesting.
However, there are other elements that can also be very rewarding, or even nerve-racking at times, which happens when you work with many different people! Mostly, because whenever human emotions and the psyche are involved, you bring together elements that are indeed even more unpredictable.
Unfortunately, I have also found that people can be impatient, wanting everything to happen in the short-term, or have their opinions which with investing can be detrimental! It often stems from believing in everything they hear or read, acting on advice from the next-door neighbor or family friend, or from deep-seated emotions or fears. However, it often leads to investment irrationalism, bailing at the first signs of trouble, or never sticking with even the best laid financial plans. Frankly, I have found that none of this rarely leads to investment success!
Ironically, I have often remarked that the best part of my job is meeting those “many different people.” Particularly rewarding, is when there are smiles because their child has enough money to go to school, a client has enough money to retire on their terms, or that there was a long-term care plan in place for a sick loved one.
Whether it’s helping the young couple to start saving $200 a month or Mrs. Jones being able to travel often to spend time with her grandkids, it all adds up to many satisfying stories, wonderful relationships, and a tremendous feeling of gratitude knowing that I made a difference!
Through this vast array of experiences, I have also learned that if there was such a thing as a “perfect” investment, it would have many of these benefits, such as:
1) Protect people against stock market losses
2) Have tax-free growth
3) Stock market growth potential
4) Provide lifetime income if needed
5) Eligibility; regardless of income limits
6) Payments structured to meet any budget
7) It would be self-completing if you died for your loved ones
8) Flexible, liquid, and no early 10% withdrawal penalties
It would be even crazier if something like this actually existed! However, most people would probably feel that it would be too good to be true or wonder what’s the catch? Maybe they would shy away if didn’t fit in the same old stock and bond, the “traditional” investment box, because that’s all that many of us know with investing!
Ironically, what if it actually could be appropriate for many people for many different reasons, but punished because it doesn’t fall within the mainstream of money management, people just didn’t know about it, or maybe it was criticized because the experts had their own agendas, or people just didn’t spend time looking at other options.
Well, guess what: Such investment does exist and you guessed it, many people criticize it, others embrace and many just don’t understand it!!
Life Insurance, specifically a policy design using Indexed Universal Life (IUL), has those (8) attributes that I mentioned earlier. And, yes, I have found that it’s very much misunderstood, maligned, and often written off for a multitude of reasons.
However, I do feel that those reasons often boil down to hidden agendas (such as stockbroker’s encouraging people to invest under their fee-based money management programs), or that customary… it’s too complicated, too hard to understand whenever something requires some additional research or doesn’t fall into the “traditional” mainstream thinking. Candidly, I have learned that to brush over things on hearsay or being maligned by biased opinions, often doesn’t tell the true story.
Unfortunately, choosing to do nothing because it’s simple and easy could very well mean missing out on something interesting or beneficial as well. By moving on from considering an IUL program is a perfect example of missing out on something that could be a powerful piece in a diversified portfolio!
However, while we don’t have time to spend hours and hours reviewing this program extensively, I do feel that at a minimum overview helps to understand it better. As was mentioned earlier, this strategy flies directly in the face of a lot of broker’s desires to have money under management for an ongoing annual fee (like a 1% fee), which is called managing for Assets Under Management (AUM).
It’s crazy that these stockbrokers or advisors get paid no matter whether you make money or not, while the investor stomachs all the risks or losses. I remember 2008 being the ultimate example of this when every broker seemed to get a hall pass or off the hook because of the “unpredictability” of the stock market corrections. Isn’t it crazy that also seemed to be the case only 6 years earlier with the Tech Bubble correction from 2000 to 2002? It’s okay to lose 30%, 40%, even 50%, and the broker’s still collecting their fee?
It seems absurd, and that’s acceptable given that kind of advice, but it’s unthinkable to consider an (IUL) policy that doesn’t have that 1% ongoing, longer-term fee or that they write off because they know little about it?
Also, in this new norm of being a fiduciary, isn’t it their responsibility to act in a client’s best interest by making them aware of a potential various solution? Or is that many of them aren’t truly fiduciaries?
I guess I could ask the same question of the media pundits like Suze Orman or Dave Ramsey when being ridiculous when you peel back their business models or question their investment advice.
One of my favorites is when Dave Ramsey often suggests simply putting your money in “12% mutual funds,” because those are all over the place and investors get how to do that. Or, Suze Orman is selling some financial tools as the ultimate solution to trust planning or investment advice through some packaged product.
I’m certainly not poking fun at all their advice because they have good things, but also observations that I might disagree with after 34 years. Candidly, there advice on Indexed Universal Life (IUL) is certainly one of them because it seems if it doesn’t benefit them, or falls outside their scope of advice, then there quick to chastise it or not really look at all the facts. They simply say things like, “It’s too expensive or too complicated,” or you’re crazy for even considering it.
I look at their products, advice, and question if it’s truly in everyone’s best interests to truly write something off because it doesn’t fit their business models or advice. Because they victimized people with their advice when the market drops 30% or 40%, and an IUL program could have avoided all of that?
What about if their products have too many costs or fees, or it’s all about selling their listeners and readers a bunch of products that they really don’t need or understand? My point is that there are many reasons to question your brokers or media stars about when they simply write off something without giving their readers or listeners the benefits of at least considering a different program or solution whether it’s IUL or something else!
Let me touch on a few easy things to consider with Indexed Universal Life Insurance as a piece of your portfolio:
Point # 1- The Tax Code and Banks
Life Insurance can be a powerful tax planning tool that’s in the Tax code under 7702.
Besides the social good of helping widows, orphans, and business, life insurance enjoys powerful TAX-FREE benefits in the tax code, under 7702! Like any tax savings opportunity, the IRS does set limits and different rules. But, of the many different tax savings alternatives that are available, life insurance is possibly the most flexible, has generous funding limits, and allows your monies to grow tax-free in the stock market while eliminating the market losses!
In my opinion, there’s also the fact that many of the top banks have over $190 Billion in cash value life insurance as well, which furthers points to the potential power of this strategy at making money for people, the flexibility, and liquidity. Admittedly, it does beg a simple question, “If many of the top banks can have over $190 Billion invested in cash value life insurance, then why wouldn’t I be considering it for a piece of my portfolio?”
This snapshot of B of A’s balance sheet shows how much they have in life insurance, which is over $22 Billion at last check at the FDIC government website.
Why do banks have so much in life insurance? It’s because according to bank regulators, life insurance is considered Tier 1 capital, which is a core measure of a bank’s financial strength from a regulator’s point of view. I feel that this further dispels another myth that I have often heard over the years with insurance, “That premiums, or monies that you put in a life insurance policy, are a black hole!”
Quite the contrary, the money wouldn’t be considered Tier 1, safe and readily accessible if that wasn’t the case, because banks need to get their hands on their money quite often for customers, loans, or a variety of other reasons. It’s listed as a conservative, liquid asset on the balance sheet as it would be for businesses or yourself. However, it also reiterates the conservative nature of this strategy. We take great pride in designing any policy to be tailored to a client’s specific needs while making sure that they know why it makes sense as a piece of a diversified portfolio.
Frankly, there are other benefits for banks and investors, which we will touch on briefly again, such as:
1) The ability to earn double-digit returns in the stock market
2) Downside protection from any stock market losses
3) Tax-Free returns
4) Flexible, liquid, easy access their principal
5) Death benefit protection for key employees and their loved ones
Point # 2- Indexing
As you know, investing in the stock market exposes your money to the risks of it going down, but IUL’s have a unique investment feature. Index crediting is a powerful way to grow your money without losing principal during downturns, like the 30% correction that happened earlier this year in March of 2020. It obviously stands to reason that if you can avoid the losses, it can help your savings to compound over time quicker. In my opinion, this is just huge because it can also eliminate one of the biggest deterrents to investors making money..their emotions! Many studies have pointed to investors hurting themselves because they sell at the first sign of trouble, or wait for the market to go back up before they are convinced to buy, missing potential returns.
The concept of “ Zero is your Hero,” came from the indexing strategy because your money gets the 0% floor of protection when the markets drop compared to investing in the traditional equities approach and losing 30%, 40%, etc. It can be a real gut check to stay invested when it seems like the bottom is falling out of the market, but not when you know that zero is your worst-case scenario! I believe that this helps to explain why some people may find this hard to believe or this “sounds too good to be true.” However, this is absolutely a terrific benefit and only reiterates why banks would invest some of their customer’s money in insurance. Imagine your bank paying you roughly 1/10th of a percent of your savings, while they are taking your money and investing it for higher yields in the stock market and not having to worry about losses! Why wouldn’t you consider doing the same with some of your money?
Most people don’t fully appreciate the destructive nature or avoidance of your returns by simply missing the market downturns, or letting your emotions get involved and making potentially bad investment decisions.
This slides further illustrates just how destructive losses are and how much more your portfolio has to make back just to get back to even, so when you have the protection of an index crediting strategy in your portfolio, it takes this risk off the table, out of this piece of your portfolio!
Finally, I feel that the power of indexing really hit home during the market years of the “lost decade,” from 2000 to 2009, when most people spent that decade making little or even losing money.
If you were retired, had a fixed income, or were counting on some reasonable growth in your portfolio, how did that decade feel? Now, imagine that you a strategy in your portfolio that provided the peace of mind with index crediting, and knowing that you had more certainty in that piece of your account.
While most of your peers would have spent that decade losing money or making very little, indexing would have allowed your money to keep growing, insulating it from any market losses. In the slide below, indexing could have provided you as much as 50% more compounded in one of the most challenging decades in history!
Point # 3- Income
Now that we have touched on the tax benefits and indexing of the IUL in helping to grow your money over the longer term, it’s time to see how insurance can provide you sustainable streams of retirement income. However, the IUL strategy can also create a tax-free retirement “paycheck!”
Many retirees fall victim to the reality of taxes impacting their tax-deferred accounts, like IRA’s or 401(k)’s. Through no fault of their own, people have been told to save in these tax-favored accounts with very little regard to the impact of taxes. It doesn’t take much guessing to realize that while the government gives you a tax break initially for saving in these accounts, there probably has to be something in it for them, so you guessed it: TAXES!
Frankly, taxes are the largest bills that most of us will face over our lifetimes but can have a dramatic impact on your retirement income as well. Imagine having saved for many years to have $300k or $400k in your IRA or 401(K) and have 22%, 24%, or 30%+ lost in taxes.
I’m constantly amazed at how many people that I meet telling me how they have $300k to $500k, but not considering what the impact of taxes on their money, or that taxes are going to knock thousands and thousands of dollars off those values. Or better yet, trying to plan consistent, predictable retirement income around losing 20%, 30%, or 40% in the stock market? The consistency and predictability of IUL in providing so much more predictable income and then the power of keeping more of what you have worked so hard to save can have an extremely positive impact on your income throughout your golden years. You know the old saying, “It’s not what you make, it’s what you keep.”
I have always felt that it was so much easier to plan a more stress-free retirement when you aren’t being whipsawed by the volatility of the market volatility and can plan around a very predictable lifetime income, especially TAX-FREE! It also reinforces the fact that there are other ways to potentially invest a portion of your money or the value of having some tax-smart investments.
By knowing all of your retirement planning options, I feel it allows you to potentially diversify your retirement assets. My hope is that you can see that IUL planning, when structured properly, can help to supplement your needs throughout your golden years. Finally, in addition to the liquidity, tax benefits, and indexing strategy, any remaining monies in your policy can pass to your loved ones tax-free as well because the IUL has a death benefit with any monies still in the policy.
There are drawbacks to this program, like qualifying for the insurance, making sure you make your premium payments, and costs/fees to consider, but the purpose of this summary was to create awareness. It’s important that you consult an experienced professional that designs a policy to fit your needs and requirements as any policy can be customized.
As I wrap things up, I’m reminded of Martin Ruby’s book, The No-Compromise Retirement Plan, and how summarizes (3) very important risks that every investor needs to know when investing in the stock market with a “Traditional” approach. The technique of accumulating your money in traditional tax-deferred IRAs, 401(k)’s and quite possibly ROTH’s on some levels.
What makes Marty special in my opinion is that he is an actuary by trade, focusing on math in identifying, evaluating, and eliminating risk. He also has decades of experience as an insider in the world of financial services and insurance structuring products and ideas that help maximize benefits for savers.
Marty argues that (3) things can have a dramatic impact on your retirement savings, or
“ Overcoming the Compromise in Your IRA to Live a More Secure Retirement.”
– Structural Risks
– Market Risk
– Tax Risks
It’s very important to know all your risks, which programs should you use for saving? How do they work? You need to analyze the savings tools that are available to you because we are often charged with making our own decisions and doing it right. Are there some better ways for me to save?
Investing in your money in the stock market has risks and we want growth, but we face the real risk that maybe we won’t have enough. There’s a real risk of loss and will I have enough growth to offset losses, or can I emotionally handle losses in my accounts with my hard-earned monies?
I had indicated earlier that I felt taxes take an enormous toll on your tax-deferred savings vehicles, so you need to ask yourself, “How much am I really going to be able to use?” Marty feels that too many people resign themselves to paying taxes and feel that there is nothing they can do about it! He argues that “ The uniformed taxpayer will pay much more in taxes than the informed taxpayer.” Understanding tax risks, and doing something to minimize those can have a very positive impact on your retirement savings, income and to even create a legacy to pass on to your loved ones!!
It starts to become obvious what Marty suggests that investors need to consider with a portion of their retirement savings, and that’s “exploring the benefits of a portion of your money invested into an IUL insurance program, and not simply left to all the risks with “traditional” tax-deferred savings vehicles.”
1) Boosting accumulation potential
2) Safeguarding against the downside risks of the stock market
3) Creating tax-free lifetime income
4) Takes away so many of the uncertainties with investments that we are often left to solve on our own!
There are so many things that I could discuss when considering an Indexed Universal Life program to your investment and retirement planning needs. As I touched on, there are many things to consider, but the proper design to fit your needs is at the top of the list! However, I feel that because this strategy doesn’t fit in the typical stock/bond investment box, it becomes an objection that is heavily scrutinized with everyone trying to focus on the reasons why you shouldn’t do it, rather than the many possible benefits that it can provide.
Also, given the historically low tax rates that we are currently in, and at a minimum taxed slated to go up by the end of 2025 or even earlier, considering using some of the terrific tax planning opportunities that are available today! An IUL could be a very powerful way to have all these benefits that I have been describing, and literally could save you tens of thousands of dollars moving forward! It also stresses the importance of considering your different investment options when it comes to investing.
Is the IUL perfect, “No,” but it has often been saying, “that there’s no such thing as a perfect investment!” Fortunately, when you really take the time to explore this option with an experienced advisor, you may decide that this program clicks many of the right investment boxes for you and a piece of your portfolio.
I do feel confident that when I say, “pick most growth-based investments, give them the long-term patience that they need, and you will often have something that can provide you terrific benefits!” So whether it’s stocks, bonds, or Indexed Universal Life (IUL), it needs to funded properly and given time to grow. IUL, with its excellent tax-free compounding, downside market protection, and reduced expenses over the long term can certainly add value to any portfolio when it’s designed and used right, so maybe you need to give it a hard look for yourself!