(Legally) Cutting Out the Tax Man in Retirement | Fox Business

(Legally) Cutting Out the Tax Man in Retirement | Fox Business

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By Scott Mann / Published February 22, 2012 /

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savings plan today¡ªand most investors know nothing about it.

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This retirement savings vehicle is not a company-sponsored,

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pre-tax qualified, 401(k)-type plan. It¡¯s also not a Roth. It¡¯s not an

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annuity or whole life. Despite sales of well over $1 Billion in 2011

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for the top 39 carriers surveyed, it is the financial industry¡¯s No. 1

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secret¡ªIndexed Universal Life (IUL).

Regulations

costing taxpayers

and businesses big

bucks?

To explain why IUL is a powerful supplemental saving vehicle to an

employer¡¯s 401(k) plan, and a replacement for those whose

employers don¡¯t offer one or for some people who don¡¯t trust the

market, we need to start with the fact that after a generation of use, MORE FROM FOX BUSINESS

qualified plans¡ªcomprised of equity-based investments¡ªare

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generally acknowledged as failures.

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Why is this the case? For one, the performance of qualified plans

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stock market in a decade. Investors haven¡¯t made money since

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we have experienced since 2000 notwithstanding, one major

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including those in their 20s and 30s, are too afraid to save in the

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The 401(k) retirement account has long been the ¡°go-to¡± first

bucket to fill to provide for retirement needs, yet this is a mistake.

Stephen Gandel devoted his article in TIME magazine¡¯s Oct. 9,

2009 issue to ¡°Why It¡¯s Time to Retire the 401(k)¡±:

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opted out for

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(Legally) Cutting Out the Tax Man in Retirement | Fox Business

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motherhood, then

rotten repository for our retirement reserves . . . . The solution: a

opted back in

new type of insurance. Retirement savings, it turns out, are exactly

ArcaMax

the type of asset we need insurance for. We need insurance to

What's this?

protect against risks we can't predict (when the market collapses)

Investing ?

and can't afford to recover from on our own . . . . Recent opinion

polls show that people would be willing to give up the flexibility of a

401(k) for a guaranteed return. 1

Gandel¡¯s idea is not really new, having enjoyed a 14-year track

record. You insure nearly every other aspect of your life: your

health, your home, your vehicles. Why not protect your safe,

Activist investors making people a

lot of money

comfortable retirement against the risks we can¡¯t predict and can¡¯t

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afford to recover from on our own, and why not cut out the tax man

Who is the man replacing the 'Bond King'?

in the process? These are all legal, and totally above board,

established life insurance principles. It may sound too good to be

true, but it¡¯s just what life insurance is and does. Yet the general

BANK RATES

Mortgage

public¡ªand even many financial advisors¡ªhave absolutely no

Home Equity

Autos

Loan Type

CD Rates

Graph

Rate

+/-

Last We

idea that a tax-free, market-risk-free, gains-locked-in,

30 Y Fixed

4.11%

4.17%

their noses for 14 years. Indexed Life¡¯s primary benefit is the fact

15 Y Fixed

3.22%

3.26%

that, like an indexed annuity (and unlike a mutual fund Roth), you

30 Y Fixed

Jumbo

4.68%

4.58%

keep all the gains and suffer none of the market losses. But there

are many more benefits included that no other investment can

5/1 ARM

3.46%

3.33%

5/1 Jumbo

ARM

3.46%

3.73%

congressionally-approved solution has been sitting right under

lawfully offer, with the possible exception of a Roth.

Let¡¯s lay out the basic principles of Indexed Universal Life (IUL),

and then let me take you through a rough equation to crystalize

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Enter Zip Co

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just how powerful a retirement savings tool this vehicle is.

Indexed Universal Life¡¯s basic principles:

1. Can be funded with after-tax monies or pre-tax monies, as in a

defined-benefit pension plan.

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$220.50

2. Assets are protected against market loss and backed by the full

faith and credit of the issuing company. While the funds are not

FDIC-insured, ¡°legal reserve¡± requirements apply with the insurers.

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3. Assets are ¡°linked¡± to the market via the selected index: Dow, S

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from Proven Performance.

and P 500, Global, or a mix of several indices.

4. Any gains, being real, interest-bearing gains (subject to a cap),

are locked in and never given back: the policy holder accrues a

gain, or a zero (in the case of a down market), but never a marketinduced loss.

5. Historical returns, based on actual illustrations from the top

carriers going back to the late 1980s, are usually somewhere

between 7-9%, mean actual interest rates of return.

6. Income can be pulled out prior to age 59.5 and is ¡°tax-free.¡± A

withdrawal is considered a policy loan against the death benefit,

which acts as collateral.

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(Legally) Cutting Out the Tax Man in Retirement | Fox Business

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7. The death benefit is paid out to the beneficiary tax-free.

Let¡¯s use an actual client case study and illustration to do the

math. Now, this is just an illustration, and if there is one thing to

consider about an illustration, it¡¯s that its accuracy can¡¯t be

guaranteed, as it¡¯s a hypothetical estimate.

For our example, let¡¯s use a hypothetical client. Jim, age 40, has

been happily married to June, age 35, for 16 years. They have two

young children, ages 6 and 8 years. How much would Jim have to

put away into conventional stock-based, non-principal-protected,

non-tax-free investments to get the same income benefit in

retirement?

Here are some rough numbers. They can afford to fund the

Indexed Universal Life account with $1,666.66 (totaling $20k per

year) by the automatic bank draft from his institution to the

insurance company. The plan is very flexible, but they plan on

funding this for 24 years, then to begin taking retirement income at

age 65 for the remainder of their lives. It will become like their own

self-funded, self-controlled, tax-free hybrid pension. He would

have invested a total of $480,000 over 24 years, then turned

around and started pulling tax-free income in year 25. The

illustration shows tax-free income of $162,399, at their tax rate of

30%, an equivalent income of $211,118 per year.

Now, how much would Jim have to invest MONTHLY, in another

investment (stocks, bonds, real estate) over the same time frame,

assuming it made an average of 8% per year, to be able to pull 5%

out for the rest of his life?

Starting with the $221,118 per year tax equivalent income, divided

by 5% recommended income withdrawal rate from stocks/bonds,

the total comes to $4,222,374. This is what we would have to save

over this 24-year period, the future value of his monthly investment

+ 8% average, every year, without fail, in the actual stock market.

Now let¡¯s use the financial calculator to find the monthly payment

in today¡¯s dollars, making 8% (assuming you could make 8% in the

market) over the 24-year period before you would begin taking

income. You would have to invest $4,872 per month, every month,

(that¡¯s $58,465/year), or $1,403,161 in principal alone, earning 8%

for 24 years to equal this $4,222,374, in stark contrast to the

$480,000 he put away in principal for the IUL.

Again, this is just an example, but it shows that an IUL would have

provided from age 65 to age 85 $3,247,980 in total tax-free income,

then a tax-free death benefit of $922,638¡ªfor a total tax-free family

benefit of $4,170,618. This could represent a large portion of their

income needs. While past performance is never any guarantee of

the future, we really cannot illustrate these products historically at

less than 7-9% interest rate returns, since you make a gain or you

get a zero. On top of this, these returns are all passive; you didn¡¯t

have to manage anything. As a footnote, since there is no age 59.5

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(Legally) Cutting Out the Tax Man in Retirement | Fox Business

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restriction, many parents use IUL cash values for college funding

as well.

It looks like odds are good that Indexed Universal Life may offer

you roughly two to three times the amount of benefit over

conventional investments, depending on the actual index returns

and your tax bracket. This is a result of protection of principal

against market losses, the indexing, and legally cutting out the tax

man. You have harnessed what Einstein called one of the most

powerful forces in the universe: compounding interest.

You can read more from Scott at



1 Gandel, Stephen (2009, October 9). Why It¡¯s Time to Retire the

401(k). TIME. Retrieved from

/article/0,9171,1929233,00.html.

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