The Ins & Outs of Indexed Universal Life Insurance

Have you considered how much of your retirement funds will be left after paying taxes? Depending on factors such as your income level, sources of income and where you live, your tax burden could be rather high.

Each state taxes retirees differently, so learn what to expect if you move after retiring. This list shows each state’s retirement taxes.¹

An indexed universal life insurance policy is often overlooked as a tool to help you keep more of the money you’ve saved for retirement. Let's unpack the power of an indexed universal life policy and how it can provide flexibility, downside protection, and tax efficiency in your retirement planning.

What is indexed universal life insurance (IUL)?

Commonly called an IUL, indexed universal life insurance provides a death benefit to help keep your family financially protected when you are gone and a cash value component that you can use to grow wealth while you are alive. If you're looking for more control over your financial future and a great way to supplement your retirement or other savings goals, indexed universal life insurance can be an excellent option.

Here's a rundown of some unique indexed universal life insurance features

• Based on a market index performance: The policy grows in value based on a stock market index like the S&P 500. This means that your money can grow faster if the market does well.
• Changing interest rates: The interest you earn can go up or down, depending on how the market performs. Most IULs have a cap on how much interest they can earn, which helps protect you from extreme market fluctuations. Considering that most IULs have a floor rate of 0%, you'll get a minimum return. As a word of caution, you must be careful to make premium payments in sufficient amounts to cover the administration costs and avoid a policy lapse.
• Flexible payments: When you purchase your policy, you can select how much you want to pay. This flexibility is helpful should your financial situation change in the future. Note that any changes in premiums—both increases and decreases—will affect the policy's performance and may cause it to vary from its initial projection..
• Tax benefits: The money you earn grows without being taxed until you withdraw it. Plus, you can take out money from the policy without paying taxes, which can be a smart move for your financial planning goals.

HWhat are the tax benefits of IUL?

Taxes can hit your retirement money hard, so it's worthwhile to think about life insurance types that offer tax advantages. IULs can offer at least three potential tax advantages:

1. Tax-free withdrawals and loans: Withdraw funds or take out a loan from the cash value without incurring taxes. Fees and interest may apply to loans and withdrawals.
2. Tax-deferred growth: With tax-deferred growth, your cash value builds up quickly. You will, however, pay taxes on any investment gains when you withdraw your money.
3. Tax-free death benefits: Your beneficiaries receive death benefit funds after you die and won’t have to pay taxes on them.

How does the IUL cash value work?

When the market index that's tied to your indexed universal life insurance policy performs well, your cash value will grow accordingly. Every policy carries different cap and floor rates, and that can affect your return. To get the best performance from your cash value, it’s important to consider:

1. Participation rates: The percentage of the index’s performance that gets credited to your cash value account. A higher participation rate may mean higher cash value growth.
2. Caps: The maximum interest rate your cash value can earn, regardless of the index performance.
3. Floor rate: A guaranteed minimum interest rate, serving as a safety net during market fluctuations.

If you are facing an unexpected medical situation or financial emergency, you can often borrow from your cash value tax-free and repay the loan according to a schedule.

Ultimately, you may consider how an IUL could enhance your retirement funds portfolio rather than using it to replace other retirement fund strategies.

Consider an IUL as part of retirement planning

Another reason to invest in a tax-saving life insurance policy like IULs: You could lose money you've saved in a traditional retirement fund based on changes in tax laws, your tax brackets, and deductions. For example, while taxes went down to 37%, from 39.6%, because of the Tax Cuts and Jobs Act, that benefit could end in 2025 if the law is not extended.² Keep this in mind as you plan your retirement.

Remember that most retirees live on a fixed income, so keeping taxes low is really important to ensure that you can live comfortably. Contact Mutual of Omaha to receive a quote for an indexed universal life insurance policy to help grow your retirement portfolio.