Why Indexed Universal Life Insurance Policies Create an Anchor in Our Financial Freedom Strategy

Have you heard of indexed universal life (IUL) insurance policies? We know, we know…no one wants to talk about life insurance.

For us, our IUL secures our portfolio and allows us to travel full-time with our family without fear! Not only does it provide us life insurance AND long-term care, but the value in the account will never go down. Also, the net surrender value in our IUL provides a pot of money we can borrow against when the stock market drops or another investment opportunity pops up. In general, an IUL provides the diversity we need in our portfolio to feel protected in a down market.

We learned all about the benefits of an IUL when we took financial education courses through The Perfect Portfolio and further after reading Top 25 Ways an IUL can Secure your Financial Future.

IULs are five things. They are permanent life insurance, long term care, tax efficient, a non-correlated asset, and you can borrow from them.

Life Insurance

This goes without saying. IULs are a permanent life insurance policy and will pay a death benefit to your beneficiaries. While there are other permanent life insurance options, we went with an IUL over others, like whole life, because we know exactly what premium and fees we are paying in the policy.

Long-Term Care

Long-term care is important to us as we’ve recently seen our grandmother deteriorate in a long-term care facility. She was there for rehab after a fall, but it was a small town, and therefore it was attached to the long-term care facility. We want to ensure we have money for in-home long-term care and also so there is no burden on our children to take care of us when they are also taking care of their own families.

Also, many states are currently considering a long-term care tax which would be similar to social security and taxed on everyone’s payroll. To date, Washington has implemented this at 0.58%, but California, New York, North Carolina, Michigan, Montana, and Pennsylvania (amongst other states), are not far behind in implementing this. If you have a life insurance policy with a qualified long-term care rider, you will be exempt from this but only if you purchase it in advance of the long term care tax being implemented in your state. Some policies do have long-term care riders but may not be qualified as exempt from this tax, so if you already have a long-term care policy be sure you have a policy in place that your state will accept for the tax exemption. To find out, you’ll need to reach out directly to your insurance company.

Adding a long-term care rider to an IUL is less expensive than a separate long-term care policy. Long-term care riders on an IUL policy are also less expensive annually than this tax will be. Based on my and my husband’s previous salaries and our current IUL long term care riders, we are saving about $750/year (which would increase as our salaries would increase, of course). While maybe that doesn’t seem like a significant amount - over a 30 year career, the future value of that money considering an average compounding interest rate of 8% would be greater than $100,000. Our preference - we’ll keep that for ourselves or our kids colleges instead of sending it to Uncle Sam.

Tax Benefits

IULs are considered triple tax protected. You are not taxed on their growth or distribution and they are free from the death tax. They make great solutions for high net worth individuals seeking to lower their tax bill.

Non-correlated Asset

IULs grow without risk meaning their value never goes down. Every year their value is locked in. If the market takes a 20% dip one year, they remain the same value. If then the next year, the market has a 20% gain, your account grows from its baseline value and doesn’t need to recover from the 20% dip. We use ours as a backup emergency savings for this reason.

IULs also have really great investment options within them. While the insurance industry is only able to say these make about 7% in their illustrations, the expected earnings in these investment strategies are far greater.

Borrowing Ability

We always ensure our portfolio provides us with means of borrowing if possible. Our IUL provides us the ability borrow secured by our investments, similar to our brokerage accounts. This means we have access to money in a non-market correlated asset that doesn’t require a credit check to use. We can use this as our emergency savings. Or, if the stock market tanks, we can borrow from this and buy more shares to earn even more when the market goes up. If the housing market tanks, we can use this money to purchase an investment property to have greater appreciation when the market recovers. Our margin rate on this remains lower than our brokerage (currently at 5%) and you have the ability to borrow from the net surrender value as long as your annual premiums are paid.

Our Choice

We decided to go with Nationwide for our IUL. We like that Nationwide is a mutual company and therefore is not publicly traded so there is no fiduciary responsibility to shareholders. Their long-term care policies are approved in all 50 states and qualified for the tax exemption so we knew we’d be covered as nomads. They also have really great investment options within the IUL and the margin interest rate loans are very competitive.

In addition to permanent life insurance, we purchased term insurance. Ensure you select a term policy that is terminal, chronic, critical AND convertible. A convertible policy is important because it allows you to convert your term policy to whole life even if you are completely uninsurable at that time (e.g. you are diagnosed with a terminal illness) and you want to provide your beneficiaries a larger death benefit sum.

If you are interested in discussing life insurance options in more detail, Mindy is a licensed independent agent - please email us and we can help you find a solution that meets your needs! We always encourage you to shop around for life insurance and long-term care to compare rates and coverages.

Do you have a life insurance policy in place to protect you and your family?

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