woman with finger over her mouth

The Biggest Financial Secret I’ve Learned

John Gerstner

By John Gerstner, Vice President, Insureous Health Solutions
Life, Health and Annuities Agent | Employee Benefits Specialist

Thanks to my Dad, I’ve long prided myself on being tuned into all things financial. He was a great stock picker and real estate investor and I’d like to think a tiny bit of that rubbed off.

But when it came to life insurance, I did what most people do: buy a term policy and forget it. The only problem with term is that 99 percent of all term policies lapse without paying a claim. This is good because you’re still alive, but the cost of replacing a term policy expiring when you’re a senior is breathtakingly prohibitive.

Even as early as 2000, had I known what I know today, I would have purchased an indexed universal life (IUL) plan. (Transamerica introduced the first IUL in 1997). Experience is teaching me that this type of permanent life coverage provides the ability to leave a legacy for my children and grandchildren plus risk-free compounded growth and the ability to take out tax-free loans to purchase real estate and other investments. In essence I can borrow from my own personal bank, avoiding mortgage companies and banks. I think my Dad would have been proud of my ingenuity.

IUL’s offer benefits that extend far beyond the mundane notion of a death benefit. And they offer advantages traditional retirement plans such as 401(k)s and IRAs lack. In this article, I will attempt to uncover the wealth secrets of the IUL, explore why it might not be common knowledge and how it can revolutionize your approach to retirement planning.

For starters, with an IUL …

  • Your account is guaranteed not to lose value. Why? Your account mirrors the stock market, but it is not directly invested in the stock market. This means when the market drops, your account locks in gains and when the market goes up, your account indexes from that point.  Historically, IUL’s net 5-7 percent annually (after fees and costs).
  • You can take out loans against your cash accumulation at any time (i.e. set up your own banking system). This is good for those seeking to pay down debt or make other investments. You can take out money any time for any reason without penalty, while your account continues to earn interest.
  • Regulated by four IRS codes, IULs allow tax-free policy loans, tax-deferred growth on cash value and a tax-free death benefit for beneficiaries. There are some other built-in perks including your cash value is protected against judgments and leans, bankruptcy and wage garnishment.
  • You get an immediate life-long death benefit that gives your heirs a tax-free inheritance.
  • And there are other living benefits that allow you to pay for expenses such as long-term care, a terminal illness or chronic or critical illness medical expenses.

Let’s compare this to a 401(k) or IRA, the most common retirement investment vehicles.

  • With traditional 401(k)s, taxes are deferred. This raises the serious question: Do you think taxes will be lower or higher in the future? Looking at escalating federal debt and inflation, chances are good that taxes will be higher in the future.
  • Your money is not liquid. There are rules and heavy penalties that are applied if you access your money before age 59 1/2. In other words, someone else is telling you when you can use your money. There are also limits to how much you can save in these accounts.
  • Though you are led to believe you are saving money with no costs, there are hidden fees (usually 1-2%). Couple that with the unpredictable markets and there is cause for concern, especially as you approach your retirement age.
  • All your transactions must be reported to the IRS, and one more rule: You have to start taking required minimum distributions at age 72, whether you want to or not. This is another way the government gets into your personal finances.
  • Last, there is no death benefit associated with your account.

So why are almost all employer retirement plans built on 401(k) and IRA?

To be blunt, it’s because this is where the IRS and Wall Street (and corporations) want you to put your money. Why?

  • Corporations get a tax write-off on all the funds they match (and you pay it for them later).
  • Wall Street (i.e., financial advisors) earn 1-2 percent to manage your funds. The more your funds grow, the more they earn. (At least you are helping our economy growing by keeping one sector profitably employed.)
  • The IRS gains by taxing you on all withdrawals, and at tax rates likely to be significantly higher than they are today.

If all of this is true, why haven’t you heard about Indexed Universal Life plans?

Here are a two reasons:

  • Financial advisors might not be aware of IUL’s and/or they do not promote them because most financial advisors are not life agents. There is also a financial disincentive because money placed in an IUL is money they no longer manage for a fee.
  • Employees continue to solely offer 401(k) retirement accounts for the tax deduction and simple tradition.

If IULs sound too good to be true, it may be partly because until recently they’ve been a tool used only by the wealthy. Ironically, they are also used by major banks needing to safeguard a portion of their assets while still keeping them liquid. Visionaries like Walt Disney leveraged compound interest accounts to turn his Disneyland dream into reality. Major banks and even U.S. Presidents, including John F. Kennedy, have entrusted substantial assets to such accounts.

Admittedly, IUL’s are not for everyone, and they may not be for you.

They should only be considered as long-term life insurance strategies and another way to diversify your retirement portfolio. And one other caveat: You must qualify for a policy by passing the medical screening.

Setting up an IUL requires a full understanding of your financial goals and the ability to fine-tune all the parameters that affect cash value accumulation vs. the death benefit. Insureous Health Solutions represents all of the A-rated life insurance carriers and we will happily arrange a free consultation. Contact us at 904-295-8498.

Whether you are middle-aged and looking for a risk-free retirement account, or an investor wanting to borrow against their account to make other purchases, or a business owner that may use a policy as an executive bonus, I urge you to spend a little time researching the potential advantages of an IUL.

Who knows? This might be the best financial secret you learned this year.