Today’s episode is an IUL Q & A. We cover Indexed Universal Life Insurance and a Viewer’s email Questions are Answered.
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Thanks for watching!
Hey Cash Flow Maximizers.
I got an email today, with a lot of really good questions about indexed universal life policies and in today’s video, we’re going to answer those questions. So, stick around!
Oregon Cash Flow Pro offers free money management advice, to help you take control of your finances. And now, here is your host, personal finance enthusiast and licensed insurance broker, James Barber.
Christopher writes: I have watched a couple of your videos about IULs. Many of their features interest me, but I’m still unsure if an IUL is a good fit for me.
First, I guess I should tell you a little about myself, my goals, and why I am interested in an IUL. I am a single, 28 year old male. I have no spouse or children. And as such, I currently don’t have a real insurable need for life insurance beyond final expenses. What interests me in an IUL is the unrestricted savings/investment features and lower risk. My overall goal is financial independence and early retirement. I am currently saving in a 401k and a Roth IRA. I am looking to an IUL as a way to add some additional diversification in terms of asset allocation and location. In addition to a retirement savings vehicle, I have thought about using an IUL as a way to save for emergencies, cars, house down payments and using the loan feature to draw on the funds when/if needed. I already save for these things in different saving accounts and thought I could perhaps consolidate these into an IUL.
So, the email continues, but first I wanted to respond to the beginning part of this email, where he talks about not having an insurable interest. As far as insurable needs go, that can and often does change. Due to the nature of permanent life insurance, it can actually be a good idea to anticipate your future insurable needs. This allows you to get in while your health is good and the rates are low. Adding in the benefits of an IUL or IBC type policy makes even more sense.
So, what is your current and future insurance needs? Do you have a family or any person or organization that you would like to leave a legacy gift to, should you pass away? Do you expect to have a spouse and/or children in the future? Is there someone else that you rely on financially or emotionally, that their death could impact you, such as a business partner or your parents?
If a business partner dies, life insurance can ensure the ownership and financial strength of the business throughout that turbulent time.
If a parent dies, even if you don’t have kids, but if your parent dies, will your emotional state impact your ability to earn income, even if you don’t rely on them for income?
This is something that a lot of people overlook, when they think about an insurable need. It’s not just whether you rely on their income, but there’s a grieving process that takes place. For some people, they have no trouble getting right back to work. In fact, that’s the way they deal with their grief. They may focus on work. In which case, their financial situation isn’t impacted negatively by the death of that parent. For other people, they need that time to grieve or they want to have the option of working or not working while they go through that grieving process.
This is something that I think a lot of people tend to overlook. Think about yourself. You may or may not even know what your situation may be. If you already know your situation, and you don’t think it will be a problem working, then don’t worry about it. That’s not an insurable need.
But, if you have strong ties to your parents, if you have the type of relationship that you think you’re going to need time to grieve, or you are not sure how you will react to death of loved ones and people close to you, it might be a good idea to get insurance on those folks, so that you have the option, when the time comes.
You’re better off having the option, than not having the option and needing it. Because this is not just about getting insurance on yourself. Oftentimes you can get insurance on them as well.
So, that was my first thought when I was reading through this, is I want to make sure that he’s taking into account other possible insurable needs, before dismissing the benefit that insurance provides for folks.
Now, his questions.
Christopher writes: Based on my goals, do you think an IUL would be superior to a Whole Life policy?
And I would say, based on your stated goals, I’m going to respond according to some assumptions that I have to make. One, if I assume that you are comfortable investing in the market, since you’ve told me that you are already investing in the market, and you just want some safety from the down side, then an IUL could be a good option, as opposed to continuing to dump all of your money, All of the funds that you use for speculation, into the stock market.
I would say, check out my video on IULs and Whole Life for a more in depth comparison on those two. And then in addition, I’m going to ask you, do you have investments that are not correlated to the market? If you anticipate future insurable needs and you do not have uncorrelated investments, perhaps a Whole Life policy would make sense to have, before going for the IUL.
Whole Life has more guarantees, as well as some additional benefits that you don’t get from an IUL, such as level premiums throughout old age.
Now, due to the increasing cost of annual renewable term insurance that IUL is built on, you may end up wanting to trigger an overloan protection rider at some point. Which involves borrowing all your cash value and essentially turning off the ability to use the policy.
Now, with Whole Life, we can turn off those premiums while maintaining the ability to use the policy for banking needs, as well as, continuing to increase the death benefit. So, when you ask me which one is better for the needs that you’ve stated, I don’t quite have enough information yet, in order to confidently answer that question, but it sounds like it would meet your needs, at the base level for sure.
And, his next question: Can an IUL be a good way to save for emergencies, cars, and homes, in addition to retirement?
YES! An IUL can be a good way to save for emergencies and all of those other things. It can be used for banking purposes and cash value growth, in much the same way that Whole Life is used.
The one thing I would caution you, though, is, Whole Life generally superior for that type of use, due to the guarantees associated with it, but an IUL can definitely fit the bill.
Continuing on, he asks: When a loan is requested, how long does it typically take to receive the funds?
I would say funds are generally available within 3-10 days, depends on the carrier. Direct deposit offers the quickest turnaround on funds, while mailed checks offer the slowest. And, yes, some companies out there still insist on mailing you your checks. And it’s also going to depend on how long you’ve had your policy. There are carriers, where, when you first start your policy it may take 10-15 days to get that first check back. Whereas, if you’ve already had the policy before and you’ve already requested loans and you have direct deposit, you may be able to get it within three days.
In addition, you gotta make sure that you’re not with a carrier that might have restrictions during that first year. Some IUL carriers have restrictions on even taking any loans out during that first year. Now, it doesn’t mean you can’t utilize the cash value in that policy during the first year. It just means it’s harder. It means you’re not going to be able to do it by borrowing from the insurance company. But it has been shown, you can do that by borrowing from a bank and just using the cash value within your policy as collateral. But, for the most part, I would not recommend anybody buying a policy that restricts borrowing on it in that first year, with the intent of borrowing on it within that first year. Because, obviously, you’re relying on a bank approving of that. You have no contractual guarantee that you can borrow that money during the first year.
Moving on. He asks: Is there a limit to the number of outstanding loans?
There’s no limit to the number of outstanding loans. In fact, it works kind of like a line of credit, where it’s treated as one loan, no matter how many times you borrow from it and pay it back.
So, if I take a loan out this year and then I take another loan out next year, it ends up combining. It’s just one loan, for however much total is that I’ve borrowed, minus what I’ve paid back. Now, some companies offer fixed rates and variable rate loans. And they tell you that you can switch between the two each year. Some thing to keep in mind in that, you can only switch if there is no loan outstanding. So, if I have a variable rate loan with a company, and I want to switch to a fixed rate loan, I can’t just call them and have them switch that. I would have to pay that loan off and then borrow again, but tell them I want to borrow at the fixed rate option. Some of the small caveats there that you’ll encounter carrier to carrier.
And, he asks: Are the loans from an IUL ever taxable?
Yes. The loans from life insurance policies are taxable, but only if a MEC is triggered. Meaning, you put too much money into the policy, turning it into a modified endowment contract. Now, good thing for you, all carriers go to great lengths to not allow that to happen by accident.
If you end up putting too much money into the policy, you typically have 30 days to pull that out and make sure that it does not automatically become a MEC. Some carriers will just not receive that money. They will reject the deposit. While other carriers will accept it and then let you know, hey you went over, did you mean to? We’re going to automatically cut you back a check for what you went over or they’re going to require your input.
So, they definitely don’t make it easy to accidentally turn this into a modified endowment contract. Because, for the most part, people don’t want these to become modified endowment contracts. I’ve heard of some instances where people are fine with it if they have one big lump sum they want to deposit. That might be a good situation. But for the most part, hardly anybody does this.
And, he asks: Can the proceeds of a loan be placed back into the policy, not as a repayment of the loan, but as a premium/contribution, as a means to leverage your account and increase the growth and compounding?
YES! The short answer is yes. The loan proceeds can be placed wherever and however you would like. As soon as you get the loan, it’s your money. You can do with it whatever you want. You can use them for whatever you want outside of your policy. And within your policy you can use them to pay premiums or pay back the loan. It’s up to you. When you make a deposit, you can specify where it goes to.
Now, I personally have used them to leverage my accounts and increase the growth and compounding. You can check out my video on Infinite Banking and Dynamic Banking for an example of that.
And, he says: It seems like about 11% is a typical cap, is that right?
Basically, yeah. Cap rates have been going down recently. So, I’ve seen rates from 16% a few years ago, to 10% and lower today. 11%, right around 11% is around the typical cap for a 100% participation rate, annual point to point, S&P 500 index option, right now, as of today. Though what you will find is, there’s some special index options out there that vary wildly on the caps. So, there’s some proprietary indexes out there that offer all different kinds of choices. That’s why I was pretty specific when I was responding to your question about 11%. For the most part, IUL carriers all offer an annual point to point, S&P 500 index option, with a 100% participation rate. And for that in particular, yeah, right around 11%. It may be closer to 10% now with all the market fluctuations, so keep that in mind.
And, he finishes up with this last question: How typical is it for a company to reduce the caps?
This, in particular, is a really great question. I say you can and should view the history of a company’s cap rate changes. It will likely indicate their willingness to raise and lower caps rates. Since cap rate guarantees are very low compared to where the rates are at now, this presents one of the greatest risks to long term growth in an IUL. Theoretically, a company may reduce the caps to around 4% AND they can increase the cost of the annual renewable term insurance significantly. In practice, they don’t really do that, because it wouldn’t be competitive, it would breed ill will among clients, and basically make it harder to sell in the future. But, if a company is in dire financial straits, they could do it. This is why you see a lot of people really push Whole Life, because of the guarantees that come along with it. With the index universal life you don’t have those guarantees and the whole basis of insurance is about safety, right?
So, that’s definitely something that we want to be concerned about. I always say, this is where the guarantees of Whole Life make that a better choice for many of these situations.
All in all, as a replacement for some retirement funds, and using it for some banking and savings purposes, I think an IUL is a good option. For funneling a large portion of your income through a policy and practicing Infinite Banking to its potential, Whole Life is a better option. And also, keep in mind, there is a happy medium here. Guardian offers a whole life product with an index option. And you can check out how it looks, in this video here.
So, I hope that answered all of his questions. I will let you know if there’s a response or if there’s a clarification that he needed. Because, if he needed the clarification, our viewers watching this probably need that clarification as well.
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