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In David McKnight’s book, The Power of Zero, David talks about a “gathering storm” that is on the horizon and is closer than most people think.
This “gathering storm” has to do with America’s debt which is completely out of control due to the failure of the last two administrations to spend wisely and conservatively. Today we’re over 22 trillion underwater and that number continues to rise as the administration spends tax-payer dollars without regard for any resulting consequences.
It is forecasted by economists that soon Social Security, Medicare, Medicaid and the interest on our national debt will devour 92% of the government revenue (tax dollars) in 2020. Let’s be clear about this, the government doesn’t make money, rather it collects and spends money and they are not very good at it.
The massive debt our country is suffocating under can only be resolved by raising taxes on everyone and everything. It’s coming, so get ready to watch your retirement funds shrink as a result of congress’ insatiable appetite for more tax revenue to keep the country afloat.
The only way to preserve your retirement income from massive tax increases is to accumulate wealth and then generate a tax-free income stream. To accomplish this 75% of Fortune 500 CEOs are using Indexed Universal Life Insurance (IUL), and so should you.
How can an Insurance Policy provide an Income Stream Tax-Free?
The IUL is similar to the UL because they are both life insurance policies with a cash component attached to them. They are both flexible policies because the policyholder has some control over premium payments and can decrease or increase the death benefit to accommodate life events.
Both types of insurance are also regulated the same way as far as the IRS is concerned which actually works out to minimal IRS interference.
The primary difference in the IUL and its cousin, the UL is that the UL earns interest based on the performance of the insurance company with a minimum stated in the policy contract. The IUL, however, earns interest based on the performance of the market indices that the cash account is linked to. The ability to earn interest based on the performance of the market means the policyholder can accumulate substantial cash over time which can be transformed into an income stream before or during retirement.
Both policy types are considered permanent insurance because they will provide a death benefit for the lifetime of the policyholder.
What’s the difference in using IUL rather than a 401(k) for Retirement Planning?
Three things separate Indexed Universal Life insurance from the 401(k): limits, distributions, and taxes.
Although the 401(k) can greatly assist employees when saving for retirement, the IRS certainly keeps a foot in the door to make sure that tax-hungry legislators can take a share of your earnings. They also limit how much of your income you can defer into your employer’s 401(k) plan.
For 2019, the contribution limit for a 401(k) or other similar workplace retirement program is $19,000 per year. They do allow the employee to increase their limit of $6,000 per year once they turn 50-years-old.
Since an IUL is life insurance, the IRS does not limit the contributions you can make during the year
401(k) Distribution Rules
The IRS really has their nose in your business when it comes to distributions. If you withdraw funds from your 401(k) before you’ve reached age 59 ½, you’ll be taxed like ordinary income and required to pay a 10% penalty. Although there are a few qualified exemptions you can claim, the threat of a penalty is still a slap in the face for most people.
To add insult to injury, the IRS has control over when you MUST begin taking distributions. These are called required minimum distributions (RMDs) and are triggered the year you turn 70 ½. Even if you are still working, the IRS says you must start taking taxable distributions from YOUR retirement account.
IUL Distribution Rules
Since indexed universal life is life insurance paid with after-tax premiums, there are no rules concerning distributions. You can take money out as a loan and pay minimal interest and there is no requirement to repay the loan.
401(k) Tax Liability
Since the contributions to your 401(k) are made on a pre-tax basis, you will be taxed at your normal tax rate when you begin withdrawing funds for your retirement. The danger here is apparent. If you are paying 25 or 30% taxes on your earnings now, what do you think is going to happen when the legislators awaken and realize that they must double your taxes to manage the country’s enormous debt? When this happens (and it will) you should expect your tax liability to at least double!
IUL Tax Liability
With Indexed Universal Life Insurance, the contributions (premiums) you pay into your policy are after-tax dollars so you’ll only have to pay taxes on the interest you earned over the years. But wait a minute! According to the IRS, taking a loan against your life insurance does not count as income and will therefore not be taxable unless you surrender the policy or the policy lapses. So, just don’t let that happen.
With the IUL, your loans become a non-taxable income stream that you do not have to repay. When you die, outstanding loans will simply be deducted from the death benefit before being paid to your beneficiary.
This is where David McKnight came up with the Power of Zero. You see, since you pay zero income tax on the loans taken against your IUL and the government decides to raise your taxes by 50%, 50% of zero is zero!
How Does Indexed Universal Life accumulate so much Cash?
An IUL allows you to invest in the market without actually being in the market. Your cash account will be linked to one or more indices (that you select) like the S&P 500 or NASDAQ 100 and then your account will be paid interest based on their performance in the market.
Your account does have a limit of interest it can earn called a Cap, but it also has a minimum it can earn called a Floor. Typically, the companies we represent have a Cap of 12 – 14% and a floor of 0%. If your indices perform well and post 15% earnings, you earn whatever your Cap is. But, if your indices do not perform well and lose money, your account will not be impacted because of the 0% floor.
You will earn as if you were in the market without losing as if you were in the market.