not all iuls are set up to provide the benefits outlined in the better money™ method
Unfortunately, not all agents or advisors know how to structure an IUL to provide both life and death benefits. Even if they do, they are not always motivated or experienced enough to make sure you get the most out of your investment. it is difficult for many agents to see this as a retirement plan and optimize the variables necessary to maximize their return. The following list of six critical steps to ensure your policy addresses will help you understand if you have a policy set up to provide the benefits discussed in the better money.tm method
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As mentioned in my bio and several other places, I have spent over 1000 hours studying and analyzing Universal Life (IUL) Indexed Products. It wasn’t 1,000 hours of random research either, it was 1,000 hours (and honestly, probably a lot more) of serious, focused time to make sure I understood the nuances of this product; the variables of the contract, the price models, the costs, the results, the legalities and much, much more.
Reading: How to start an iul insurance policy
While conducting this research I learned many things. One very important conclusion I came to was that my perspective and interest in this product is somewhat unique. Not many insurance brokers or financial advisors have considered how iuls can offer clients both a death benefit and a living benefit. And even those who are interested haven’t had significant experience learning how to properly structure policies to turn them into a vital benefit.
If you’re working with a broker or financial advisor, make sure they’re knowledgeable and working on your behalf. make sure they’re talking to you about the following, and feel free to share my website and book summary with them if they’re not.
do your homework. most of the iul’s that I have seen have not been designed correctly. by that I mean in a way that maximizes the customer’s rate of return. retirement is not a dress rehearsal. It is a one-act play. There are many important details to consider when structuring an IUL to deliver the benefits outlined in the Best Money Method and ensure your game is a huge success. below are six for you to consider.
1. secure the lowest possible amount of insurance
The common convention when buying insurance is to say “hey, I want as much insurance as I can get for the lowest possible premium.” No one would say to a geico or liberty “give me the least amount of insurance on my car possible and I’ll pay you as much as your rules allow.” however, as counterintuitive as it sounds, that’s exactly what you want to do with an iul.
The insurance industry is regulated by the government and one of the things that is regulated is the minimum death benefit you must purchase based on the amount of money you plan to invest in your policy. Years ago, when tax rates were through the roof, you used to be able to buy a $5,000 policy and put $1 million on it, and many rich people used insurance as a tax shelter. uncle sam found out and you can’t do that anymore.
The government correctly determined that there must be a realistic connection between the amount of death benefit you get and the financial damages your heirs would suffer if you were to die suddenly. there are complex formulas for all this. correctly, the specified minimum death benefits are tailored to each individual and depend on her age, gender, and health status.
with an iul you want to buy the least amount of insurance you can and invest as much as you can as quickly as possible, or as quickly as makes sense given your savings goals and your capabilities and constraints. depending on your age, you will most likely have to invest the desired amount over a period of four or five years. however, this way you will build up the value of your policy sooner rather than later and start earning interest on the cash value which will become your source of tax-free pre-retirement income when needed, fund your income from retirement tax-free, and ultimately a percentage of that cash value will be distributed as a death benefit to your heirs.
2. set a minimum limit for losses
as you contribute to your iul, you’re building cash value. That cash value is the amount you can borrow against. You should be sure to work with your advisor to determine which accounts will be tied to that growing cash value. Within your policy, the cash value will be tied to an interest-bearing account. some companies peg that balance to the s&p 500, i tend to favor some policies that peg it to a more balanced index.
Regardless of what you choose, it’s important to set a minimum acceptable loss of zero, which means if the market goes down, your account balances won’t be affected. In this way, the cash value of your policy increases constantly, or it can remain stagnant in times of recession or market downturn, but you never lose money.
Related Reading: Zero Is Your Hero: The Tortoise and Hare Analogy for Retirement Savings
3. make sure your policy has a lock and restart
what happens to your money at the end of each year is locked and reset. if it has had a positive market gain, it is set as principal at the end of the year. and that principal is contractually guaranteed against any future loss. in other words, the principal can never be reduced due to a market loss. that’s the lock.
then if the market went down last year, it doesn’t have to go back up to zero before you win. instead, it starts at zero and any winnings go to your plus column, up to your limit. if the market went up, all of your profits from the previous year, up to your cap, are locked as principal, and that’s your new zero point. the year begins when your money is credited to the insurance company and ends three hundred and sixty-five days later. It’s important to make sure your policy has this feature and understand how it works.
4. choose the right person(s) to insure
one of the things to keep in mind when setting up your iul is that you can open a policy at any adult age, from the age of 18, when you are eligible to enter into a contract. the maximum age is 85, at which point insurance companies will no longer sell you life insurance. however, you can buy a policy for another person of any age, as long as you have a close family relationship with that person.
In fact, you could even buy life insurance on a newborn baby, though there would be limits on how much you could contribute and on the amount of the death benefit. I know a gentleman who owns 32 such policies, one for each of his grandchildren. he gets the proceeds tax-free from all those policies, and when he dies, no death benefit will be paid, because the policies are for his grandkids, not him.
You may decide you want to purchase the policy on your life, your spouse’s life, your children’s life, or your grandchildren’s life, and there are pros and cons to consider carefully before deciding.
5. find the right provider
Not all insurance companies are the same. There are dozens of companies offering IUL policies, from North America to Penn Mutual, Voya, and Minnesota Life.
each of them offers slightly different options. Be sure to ask your advisor about the pros and cons of each suggested policy and why they recommend one over the other. Your answers should be very clear and easy to understand, and your recommendations should be based on getting the highest possible rate of return on your investment and nothing more. If you don’t understand the options or why one policy is recommended over another, keep asking questions until you do. Again, retirement is not a dress rehearsal. you are shaping your future. make sure you do it right!
6. structure deadlines appropriately
You will be asked to commit to paying your policy premiums by a certain time to once again achieve your target rate of return on your investment and start earning interest and building cash value as quickly as possible.
Make sure you understand all deadlines. make sure you know when to contribute what amounts and feel confident and comfortable with that schedule. Make sure you also understand when you’ll be able to borrow against your policy and what the surrender value or costs are if you get into any kind of trouble. All of these considerations and the overall timeline are something you want to be very clear about in order to maximize your returns and get to the point where you can borrow against your policy as needed (for example, to finance your daughter’s wedding, make a down payment on a home or secure funds for any number of other life events.)
There are many ways to structure an iul policy and not all of them will work for you. You want to be very clear with your advisor and agent about your goals and what you are looking to do with this policy so that he or she can make sure that it will provide you with what you need.
Don’t be shy about asking questions. advocate for yourself. share my book summary if it helps. share everything you want that you found on my website. ask me a question anytime. yes, i sell iul policies and work with clients who want my help. and, before entering this business, he was first and foremost an educator. I am more than happy to tell you everything I know in the hope that you will benefit from what I have learned about this amazing product.
If you’d like to speak with me directly, visit my website and learn how to get started by giving me a call, scheduling a 15-minute meeting, or sending me a quick email.