By Bob Hemmick, Sales Vice President
Answer: For some, absolutely!
With the current tax laws regarding cash value build up and for Non-MEC plans, the ability to draw income out tax-free, this provides added leverage in addition to the actual policy performance to make the LIRP (Life Insurance Retirement Plan) a very compelling alternative for many people.
Using Life Insurance to develop a Tax-Free income has become a realistic alternative with the increased popularity of Index UL. The IUL performance potential is attractive because the cash reserve portion of the plan offers potential of stock market returns with a cap (normal range of around 12%) and a floor of guarantees, so there is never a negative return. This can be very appealing!
Some question the underlying chassis of Universal Life with reminders going back to when the UL plans were initially crediting 11-12%, which as you will recall, reflected long term bond rates. As rates lowered, of course the crediting rates dropped and consequently the cash reserves actual performance lagged the projections. Policies were sold with idea of the client not paying nearly as much premium than the WL alternative, so with thinly capitalized premium design and lower crediting rates, these policies required much higher premium to make up for the lack of performance.
Have we learned any lessons by prior mistakes? Whole Life plans sold in the mid to late 80’s did not implode like the UL plans (as described above). The Whole Life performance is driven by the dividends. These Dividend rates have dropped just like the crediting rates of UL. The reason the WL plans did not implode is because the premium level was higher – the UL plans quickly become under-funded in part because the premium level was lower to begin with, when compared to W’L’.
If the W’L’ plans were sold with limited pay scenario’s (“pay seven and you’re in heaven” as an example), they did not perform as promised either and clients had to continue premium payments well beyond target dates. Please see attached article showing the decline in the dividend rates in the last few years – again tracking long term bond rates. Interesting how the rates backing the dividends parallel declining crediting rates in fixed UL plans. Both are based on the carrier’s portfolio rates which are primarily backed by bonds.
Example of Range of Premium Design with a UL Plan
In addition to the increased potential cash value with IUL, many carriers offer loan provisions that potentially allow the client to achieve a small net gain or return on the monies borrowed, so with loans there is a positive arbitrage, usually illustrated at 2 -3%. This certainly allows a higher income stream with loans than if there was a net cost or even a WASH LOAN scenario.
It should be noted that because of this potential arbitrage whereby early loans (to offset taxes, as an example) do not create a drag on policy values as they would otherwise, some sales practice themes show aggressive borrowing in the early years. It is important to note that this practice is aggressive and ultimately detracts from the primary purpose of developing income in the later years. Think about it, given the objective is to develop cash reserves for retirement, if you earn 2% on borrowed funds versus 7%; this detracts from the primary objective.
Example of a core carrier two illustrations, where for a male age 45 a max loan is taken in year 11 – compared to values without loans:Watch Full Movie Streaming Online and Download
- Projected cash value at age 66 with no loans — $364,727
- Projected cash value at age 66 with max loan in year 11 — $195,621
- Difference is cost of borrowing — $169,106
Concluding Comparison of projected Tax-Free Income from a traditional UL versus an IUL
Male age 50 – $10,000 a year premium, solving for max. annual loans at 66 for 25 years
- Projected income from an Index UL @ 7% — $20,758
- Projected income from a Traditional UL — $4,600
Compared to tax deductable qualified plan
For: Male / 50 – STD – NT — Contribution: $10,000 for 15 years / Income @ age 66: $20,758 for 25 years
40% Tax Bracket — $20,758 Tax Free is Equivalent to:
$34,597 Taxable Income
- Which column do you think the tax collector would prefer you choose to receive a tax benefit — Blue or Green?
- Would you prefer Tax Benefits attached to the Seeds (Blue) or the Harvest (Green)?
- Burnt Orange is equivalent to taxable income, like Social Security & Qualified Plans.
Who is an ideal candidate?
Anyone with discretionary income and a desire to save for the future, to create a tax advantaged Cash flow for retirement and has a 12 year or longer time horizon before distributions are to start.