Most people enrolled in qualified retirement programs forget that their distributions will be 100% taxed at personal rates after retirement.

These programs use a permanent life insurance plan (specifically, an Indexed Universal Life (IUL) policy) with the primary intent to build cash value accumulation. Interest is paid according to the performance of selected market indexes, even though your account value is not invested and not at risk. If a market index is negative over a crediting period, the minimum interest is 0%. “Zero is your hero”, no account value is lost.

Due to the favorable tax treatment of life insurance, this cash value account and any interest earnings can be accessed tax-free via policy loans. This is a significant advantage in retirement where minimizing tax bills is especially important. Outstanding policy loan amounts are subtracted from the remaining death benefit.

This approach is not a fit for everyone. Some important considerations and restrictions:

The IUL policy must stay in force until maturity, otherwise the policyowner is liable to incur a tax event on any gains taken. This simply means that some minimal cash value must be kept in the policy permanently, even if premiums are no longer paid in.

An IUL typically has a surrender period of 12-15 years. Early cancellation will be subject to a surrender charge subtracted from the account value. As with any retirement savings plan, expect that this is a plan for the long haul. However, there are no early withdrawal penalties (before age 59 1/2), and no required RMDs.

An IUL is a life insurance plan. Your application may be declined for health reasons.

It takes 10-15 years for an IUL to accrue significant interest gains. For this reason, IULs are not usually recommended for those nearing retirement unless it can be structured to show a real financial benefit, which is not always the case.

An IUL can be improperly structured, putting the policy at risk of lapsing before maturity. This can result from lack of education and experience on the agent’s part. Before signing any application, be sure to fully understand how the policy is designed to work in the future.

The ideal client is younger, healthy and financially capable of “overfunding” their policy premiums until retirement. IULs can be set up for juvenile children and grandchildren, giving them a huge head start towards a more secure financial future. In addition, an individual IUL retirement savings program may be an option for a business owner who prefers not to offer a qualified plan for their company.

Schedule a conversation to understand if an IUL is an appropriate retirement savings strategy for your personal situation.