Blog post

It almost goes without saying: these are tumultuous times! So much so, we can’t help but wonder – what lies on the other side? Is it greater gratitude for front-line medical professionals and essential service industry employees? More virtual opportunities in business and education? Societal changes to meeting and greeting? Increased tax rates to pay for the stimulus? Perhaps new investment strategies to better weather future market volatility?

Whatever happens, when our grandchildren and their progeny study history, this period of our lives will be in those texts, as life as we know it will look dramatically different when this is all said and done. This is Life Reimagined.

With regard to financial security and income tax minimization, you may be asking, “What actions can my clients or I take now to protect assets down the road?” We believe we have an answer.

Maximum-Funded Indexed Universal Life Insurance

Think of Maximum-Funded Indexed Universal Life (IUL) as another type of “LIFE” reimagined. Typically, when considering the need for life insurance, one imagines this from the perspective of the amount of coverage required to protect one’s family or business. However, when reimagined and intelligently engineered using the maximum-funding technique, life insurance metamorphosizes into an investment strategy that is nothing short of win-win-win:

• Win: guaranteeing the investment’s security in years the market crashes
• Win: providing possible double-digit gains in years the market rises
• Win: deferring (or even avoiding) any gains on income from the investment’s growth

IUL acts as a long-term wealth accumulation strategy with an inherent built-in “safety net” when, not if, the market drops in any given year. Some other benefits include the following:

• Flexibility in the amounts placed in the policy’s indexed accounts
• Roth IRA-like tax-free growth, and with proper planning, tax-free distributions… all without any limitations associated with a Roth IRA
• Withdrawals at any time, with no penalties for early withdrawals
• Death benefit, thus self-completing in the event of premature death

How Does Maximum-Funded IUL Work?

Without going too deeply into the technical components of Max-Funded IUL, it is worth mentioning some basic mechanics:

• Investment dollars allocated to the strategy are linked to one or more indexes offered by the carrier (i.e., the S&P 500) after costs and expenses are subtracted.
• The index is determined at the beginning of the measurement period (usually one year) and then again at the end of the period. Increases in the index will result in a proportional increase in the cash value in the policy (usually subject to some cap or participation rate), while decreases will result in a guaranteed worst-case scenario of a 0% adjustment to the cash value.
• In order to maximize growth of the cash value and minimize the drag on that growth through mortality expenses and other charges, the policy is engineered to have the smallest legal amount of life insurance “wrapped” around that cash. This is the reverse engineering of a typical policy designed specifically for the death benefit.
• All growth is tax-deferred.
• If properly designed, all contributions (tax-basis) can be withdrawn tax-free, and gains can be borrowed from the contract with no tax—and most often without any interest cost. The death benefit extinguishes the loans when the insured dies, and the remaining death benefit is paid out tax-free to beneficiaries.

With all that in mind, max-funded IUL can be suitable not only for individuals looking to grow personal wealth for their own retirement benefit, but also for business owners who may wish to accumulate cash to fund existing or future Executive Compensation arrangements.

IUL comes with complexity, and before entering an IUL accumulation plan, this complexity needs to be fully explained to and accepted by the policy-owner. If properly engineered and managed, max-funded IUL can form the backbone of an exceptional long-term accumulation strategy, not only as a tool to grow wealth but also as the source of funds from which to withdraw when the market makes a massive correction on one’s equity portfolio. Since the cash account will not be impacted by the correction, other equity-based assets can be left alone to recover. All of this is within a tax-favored environment.

Truly LIFE reimagined.

‍

May 5, 2020