Here's what the problem is,    "Am I Going to Out Live My Money?"

Fact is, that we,as a society, are living longer, to much longer, than expected. Not unusual to know folks in their 80's, 90's. Whether in excellent health, mentally and physically or in need of care at home or in a facility.........Are you prepared to shoulder the costs yourself or are you interested in leveraging some of your assets to offset their loss in the event of a catastrophic event?

Having a discussion over your personal needs and concerns is first step towards fitting the right plans to them. Enjoy the material below and please call me with any questions you may have.

What is an 'Annuity'

An annuity is a financial product that pays out a fixed stream of payments to an individual, primarily used as an income stream for retirees. Annuities are created and sold by financial institutions, which accept and invest funds from individuals and then, upon annuitization, issue a stream of payments at a later point in time. The period of time when an annuity is being funded and before payouts begin is referred to as the accumulation phase. Once payments commence, the contract is in the annuitization phase.

Breaking Down 'Annuity''

Annuities were designed to be a reliable means of securing a steady cash flow for an individual during their retirement years and to alleviate fears of longevity risk, or outliving one's assets.


Annuities can also be created to turn a substantial lump sum into a steady cash flow, such as for winners of large cash settlements from a lawsuit or from winning the lottery.


Defined benefit pensions and Social Security are two examples of lifetime guaranteed annuities that pay retirees a steady cash flow until they pass.


Annuity Types


Annuities can be structured according to a wide array of details and factors, such as the duration of time that payments from the annuity can be guaranteed to continue. Annuities can be created so that, upon annuitization, payments will continue so long as either the annuitant or their spouse (if survivorship benefit is elected) is alive. Alternatively, annuities can be structured to pay out funds for a fixed amount of time, such as 20 years, regardless of how long the annuitant lives.


Furthermore, annuities can begin immediately upon deposit of a lump sum, or they can be structured as deferred benefits.

Annuities can be structured generally as either fixed or variable. Fixed annuities provide regular periodic payments to the annuitant. Variable annuities allow the owner to receive greater future cash flows if investments of the annuity fund do well and smaller payments if its investments do poorly. This provides for a less stable cash flow than a fixed annuity, but allows the annuitant to reap the benefits of strong returns from their fund's investments.


One criticism of annuities is that they are illiquid. Deposits into annuity contracts are typically locked up for a period of time, known as the surrender period, where the annuitant would incur a penalty if all or part of that money were touched. These surrender periods can last anywhere from two to more than 10 years, depending on the particular product. Surrender fees can start out at 10% or more and the penalty typically declines annually over the surrender period.


While variable annuities carry some market risk and the potential to lose principal, riders and features can be added to annuity contracts (usually for some extra cost) which allow them to function as hybrid fixed-variable annuities. Contract owners can benefit from upside portfolio potential while enjoying the protection of a guaranteed lifetime minimum withdrawal benefit if the portfolio drops in value. Other riders may be purchased to add a death benefit to the contract or accelerate payouts if the annuity holder is diagnosed with a terminal illness. Cost of living riders are common to adjust the annual base cash flows for inflation based on changes in the CPI.

Annuities: Who Sells Them?

Life insurance companies and investment companies are the two sorts of financial institutions offering annuity products. For life insurance companies, annuities are a natural hedge for their insurance products. Life insurance is bought to deal with mortality risk – that is, the risk of dying prematurely. Policyholders pay an annual premium to the insurance company who will pay out a lump sum upon their death. If policyholders die prematurely, the insurer will pay out the death benefit at a net loss to the company. Actuarial science and claims experience allows these insurance companies to price their policies so that on average insurance purchasers will live long enough so that the insurer earns a profit. Annuities, on the other hand, deal with longevity risk, or the risk of outliving ones assets. The risk to the issuer of the annuity is that annuity holders will live outlive their initial investment. Annuity issuers may hedge longevity risk by selling annuities to customers with a higher risk of premature death.

In many cases, the cash value inside of permanent life insurance policies can be exchanged via a 1035 exchange for an annuity product without any tax implications.

Annuities: Who Buys Them?

Annuities are appropriate financial products for individuals seeking stable, guaranteed retirement income. Because the lump sum put into the annuity is illiquid and subject to withdrawal penalties, it is not recommended for younger individuals or for those with liquidity needs. Annuity holders cannot outlive their income stream, which hedges longevity risk. So long as the purchaser understands that he or she is trading a liquid lump sum for a guaranteed series of cash flows, the product is appropriate. Some purchasers hope to cash out an annuity in the future at a profit, however this is not the intended use of the product.

Immediate annuities are often purchased by people of any age who have received a large lump sum of money and who prefer to exchange it for cash flows in to the future. The lottery winner's curse is the fact that many lottery winners who take the lump sum windfall often spend all of that money in a relatively short period of time.

While annuities are not strictly retirement investments, they are often favored during this life stage because of the potential steady stream of income they can provide. An annuity is essentially an insurance contract. An individual either makes a series of payments or pays one lump sum to a financial institution, with the guarantee that the institution will invest the individual’s money and pay him regular income. This income may begin right away, or it may start on a predetermined date in the future. The income may be paid out as a lump sum, it may last a brief period of time or it may continue until the individual's death.

Annuities are commonly purchased as part of a retirement savings portfolio. Retirees often favor annuities because of the regular income, and they depend upon this income, in part, for life after retirement. Annuities also carry death benefits that allow the investment to provide for loved ones after the passing of the purchaser. If an individual buys an annuity and passes away before payments have begun, the person named as beneficiary receives the payments intended for the deceased. Annuities also experience tax-deferred growth. An individual pays no taxes on the income he will receive or on any gains made from his investment until the money is withdrawn or until the payments begin.

There are two basic types of annuities: immediate and deferred.

Within these two basic categories, an annuity may also be fixed, variable or a combination of the two. Deferred annuities may also be converted to immediate annuities if an individual wants or needs to begin receiving payments sooner.

Immediate Annuities

Immediate annuities, commonly referred to as single premium immediate annuities, are generally the right option for an individual seeking payments that begin right away or right after the purchase of the annuity. These annuities are purchased from an insurance company with a premium or single lump sum payment.

In return for this lump sum payment, an insurance company issues the buyer an agreement or a promise to make steady payments to the buyer, or a specified payee, for the length of time that the buyer has chosen. In most cases, the buyer chooses to have payments issued for the remainder of his life. In general, these payouts begin approximately one month after the immediate annuity has been purchased. The payments are received based on the frequency determined by the buyer. The most common option for payment frequency is in monthly increments, but annuities can pay out quarterly or yearly. It often depends upon the financial institution's policies and guidelines, but generally an annuity buyer can choose any frequency of payment.

There are several ways to fund an immediate annuity. The cash gained from a maturing certificate of deposit (CD) can be used, along with the profit generated from the sale of a home, a business, stocks or bonds. Even a lump sum distribution from a 401(k) or an IRA can be used as a full or partial source of funding for an immediate annuity.

Advantages of an Immediate Annuity

Financial advisors consistently push immediate annuities. Retirees favor immediate annuities because of the benefits they offer – especially the security provided by such investments. These annuities provide a steady income that is at least guaranteed for a specific amount of time and has the potential to last after the retiree's death. Employees close to retirement age favor immediate annuities, as they allow for an easy transition between work and retirement while receiving a steady and dependable income. For an individual who fears outliving the current savings in his retirement portfolio, this security provides a sense of safety as he faces his life after retirement.


These annuities are also generally favored for the simplicity of the investment. In simple terms, a buyer can purchase an immediate annuity, then forget about it. The only conscious effort required after buying the annuity is to collect the stream of payments. Immediate annuities that are not variable prevent an individual from needing to watch the markets or worry about dividends and interest rates.


Immediate annuities are also generally favored because of the amount the buyer receives back. The interest rates that an insurance company uses to calculate immediate annuities are typically higher than CD or Treasury rates. Every payment includes portions of the principal, so there is a larger return than interest alone.

These annuities also receive preferential tax treatment. An immediate annuity is an ideal way to defer payment of taxes until later into retirement, when tax rates are generally lower. The funds in an immediate annuity are guaranteed by the insurance company's assets. The annuity value is only subject to the fluctuations of bullish and bearish markets if it is variable instead of fixed.

Deferred Annuities

Deferred annuities are ideal for buyers who have money to put into annuities without requiring immediate payouts. Sometimes referred to as a longevity annuity, a deferred annuity can be purchased with a premium, or it may be purchased with multiple deposits made over a period of time.


Deferred annuities are essentially the same as immediate annuities, in terms of funding sources and payout options, and in terms of the advantages such investments offer. The greatest benefit to a deferred annuity over an immediate annuity is the delay of payout to allow the funds in the annuity to accumulate.

Variable Vs. Fixed

Both immediate and deferred annuities may be fixed or variable, or a combination of the two. Fixed annuities always offer the buyer a guaranteed amount in payout that will never change. Variable annuities also offer the buyer a guaranteed payout; the value is generally lower, but it is based on the premium paid. The remainder of the payout received by the buyer depends upon how well the underlying assets within the annuity portfolio perform.

Annuity buyers may also opt for a combination of these two annuities, guaranteeing generally higher regular payouts with the potential to earn higher returns based on the performances of their portfolios in the market.


Fixed annuities help to stabilize income from investments and are most commonly used by people who are not fully participating in the workforce, are about to retire or are retired. Fixed annuities are insurance contracts that offer the annuitant – the person who owns the annuity – a set amount of income paid at regular intervals until a specified period has ended or an event has occurred. There are advantages and disadvantages to purchasing a fixed annuity, and there are many types of options that, for a fee, can be added to a basic fixed annuity.

How Do Fixed Annuities Work?

Fixed annuities can be bought from insurance companies or financial institutions with a lump-sum payment (usually most of the annuitant’s cash and cash-equivalent savings), or they can be paid for on a periodic basis while the annuitant is working. The money that is invested in the annuity is guaranteed to earn a fixed rate of return throughout the accumulation phase of the annuity (when money is being put into it).


During the annuitization phase (when money is being paid out), the balance invested, minus payouts, will continue to grow at this fixed rate. In some cases, however, annuitants don’t live long enough to claim the full amount of their annuities. When this happens, they end up passing the remainder of their annuity savings to the company that sold it to them. But whether the annuitant chooses to try to avoid this depends on the kind of policy purchased.


When you are considering purchasing a fixed annuity, it is important to remember that you can often negotiate the price of these products. Also, the amount of money that an annuity will pay out varies (sometimes greatly) among the financial intermediaries selling these products, so it’s best to shop around and avoid making quick decisions.


The two main types of fixed annuities are life annuities and term certain annuities. Life annuities pay a predetermined amount each period until the death of the annuitant, while term certain annuities pay a predetermined amount each period (usually monthly) until the annuity product expires, which may very well be before the death of the annuitant.


Different Types of Life Annuities

There are several kinds of life annuities, and they differ by the insurance components they offer. That is, certain types of life annuities may alter the future payment structure in the event of something negative happening to the annuitant, such as sickness or early death. More specifically, the more insurance components there are, the longer the payments may last over time once the annuitization phase begins (we look at how this works below), and the longer the payments are to last, the smaller they will be. The amount of the monthly payments also depends on the life expectancy of the annuitant; the lower the life expectancy, the higher the payment because more of the annuity investment must be paid out over a shorter period.


Also, the prices of life annuities are composed of the money invested in the annuity but also the premium paid for these insurance components. Therefore, the more insurance components you have, the more expensive your annuity will be. Each type of life annuity has its own advantages and disadvantages, depending on the nature of the annuitant. Let’s look at the various types of life annuities more closely.


Straight Life Annuities


These are the simplest form of life annuities – the insurance component is based on nothing but providing income until death. Once the annuitization phase begins, this annuity pays a set amount per period until the annuitant dies. Because there is no other type of insurance component to this type of annuity, it is less expensive.

Also, straight life annuities offer no form of payout to surviving beneficiaries after the annuitant’s death. Those wishing to leave an estate to their survivors would be well advised to keep other investments if they are inclined to purchase a straight life annuity.

Substandard Health Annuities

These are straight life annuities that may be purchased by someone with a serious health problem. They are priced according to the chances of the annuitant dying in the near term. The lower the life expectancy, the more expensive the annuity because there is less of a chance for the insurance company to make a return on the money the annuitant invests.


For this reason the annuitant of a substandard health annuity also receives a lower percentage of his or her original investment in the annuity. However, because life expectancy is lower, the payouts per period are substantially increased compared with the payments made to any annuitant who is expected to live for many years. Other insurance components are generally not offered with these vehicles.

Life Annuities with a Guaranteed Term


Life annuities with a guaranteed term offer more of an insurance component than straight life annuities by allowing the annuitant to designate a beneficiary. If the annuitant dies before a period of time (the term) has passed, the beneficiary will receive the sum of the money not paid out. In the event of an earlier-than-expected death, however, annuitants do not forfeit their savings to an insurance company. Of course, this advantage comes at an additional cost.


Another thing to remember with life annuities with a guaranteed term is that in the event of unexpected death, beneficiaries receive one lump-sum payment from the insurance company. The likely result of such a payout is a spike in the annual income of the beneficiaries and an increase in income taxes in the year in which they receive the payment. These tax implications can result in the annuitant leaving less to his or her designated beneficiaries than intended.


Joint Life with Survivor Annuity


These continue payments to the annuitant’s spouse after his or her death. The payments are passed on no matter what (that is, they don’t depend on whether the annuitant dies before a certain term). These annuities also provide the annuitant the chance to designate additional beneficiaries to receive payments in the event of the spouse’s sooner-than-expected death. Annuitants may state that beneficiaries are to receive lower payments.


The advantages of a joint life with last survivor annuity is that the annuitant’s spouse has the security of continued income after the annuitant’s passing. But because the payments are periodic rather than lump sum, the spouse will not be left with unnecessary tax burdens. The disadvantage here is cost. As these contain more of an added insurance component, the costs to annuitants are substantially higher.


Term Certain Annuities


These annuities are a very different product than life annuities. Term certain annuities pay a given amount per period up to a specified date, no matter what happens to the annuitant over the course of the term. However, if the annuitant dies before the specified date, the insurance company keeps the remainder of the annuity’s value.


These contain no added insurance components; that is, unlike the life annuities discussed above, term certain annuities do not account for the annuitant’s condition, life expectancy or beneficiary. Further, in the event of failing health and increased medical costs, the income of a term certain annuity will not increase to accommodate the annuitant’s increased expenses.


Because these annuities offer fewer insurance options and therefore pose no risk to the insurer or financial-services provider, they are substantially less expensive than life annuities.


The disadvantage of these income vehicles is that once the term ends, income from the annuity is finished. Term certain annuities are often sold to people who want stable income for their retirement but are not interested in buying any sort of insurance component or cannot afford one. 


Qualified and Unqualified Annuities


For all fixed annuities, the growth of the money invested is tax deferred, but annuities can be purchased with pretax income and be tax deferred, or they may be purchased with money that has already been taxed. The type of income (pretax or after-tax) with which an annuity is purchased determines whether it qualifies for tax-deferred status.


Those annuities purchased with pretax income qualify for tax-deferred status because the money invested in them has never been taxed. Qualified annuities are purchased at retirement with funds that have been invested in a qualified retirement plan, such as a 401(k), and have grown tax free.


Qualified annuities can also be bought periodically over the working life of the annuitant with money that is not yet taxed.

Annuities that are purchased with money that has already been taxed at the income source do not qualify for tax-deferred status. These are usually purchased at retirement or during the working life of the annuitant.


The advantage of a qualified annuity is tax-free growth on invested money, and tax is deferred until the money is paid out. The advantage of an unqualified annuity is tax-deferred growth on the income made from taxed money invested in the annuity.


In the case of either qualified or unqualified annuities, when the annuitant passes away, the beneficiary will owe very high taxes on the investment income. Beneficiaries do not enjoy tax-free status on annuities they inherit. When annuitants are doing their estate planning, it is important to consult with a specialist or do careful research to ensure that their loved ones are not being left with a tremendous tax burden.


The Bottom Line


Fixed annuities are a powerful vehicle for saving for retirement and guaranteeing regular streams of income during it. They are often used for tax deferral and savings. At the same time, annuities can be very tricky to manage for maximum returns, as the cost of insurance features can eat into the return you get on your initial investment.

Annuity contracts are complicated, and those who don’t understand them may end up paying a a great deal of money for an instrument that doesn’t serve its intended purpose. To reap the benefits of reduced taxes, stabilized returns and the invaluable peace of mind that fixed annuities can offer, investors need to thoroughly research and consider these instruments against other retirement income, such as pension payouts, 401(k)s and IRAs.




Very few topics in the world of personal finance generate as much heat as annuities. If you listen to the personal finance experts on TV, annuities are the very devil. If you listen to many financial advisors and insurance salesmen, they are the greatest thing since sliced bread. 

The reality, however, isn’t as black and white as some would paint it. 

Annuities are tools, just like mutual funds, CDs or savings accounts. You pick a tool based on the job you want it to do. You aren’t going to use a screwdriver to pound in a nail, and you aren’t going to use a hammer to screw in a screw. Annuities can work great in the right situation. In the wrong situation, they are horrible. I plan to write soon about when to use annuities and when not to use them. But, in this article I thought it may help to review the basics.

Annuities fall into two categories: immediate annuities and deferred annuities.

Immediate Annuities

Immediate annuities are basically like a pension. You give your money to an insurance company, and they promise to give you an income (which starts immediately) in exchange. The first important point to make is that once you invest your money in this annuity, the lump sum is no longer your money. In most cases, you can never get it back. I am aware of only one company that will allow you to commute the annuity and get your money back. This illiquidity is probably the main reason why immediate annuities aren’t very popular. 

While you don’t have a right to the lump sum anymore, you do have a right to income off of it. This can be an income that lasts as long as you live, known as a life only annuity. It can last as long as you and your significant other live, known as a joint and survivor annuity. Or, it can be an income that lasts for a guaranteed number of years, typically 5, 10, 15 or 20.  What happens if you choose a life only annuity, and then die the next day? Well, unfortunately, you just gave your insurance company a windfall, because they aren’t obligated to mail out a single income check. 

For this reason, most people combine the life only or the joint and survivor option with a guaranteed number of years. So for example, if you want to make sure that income checks are paid out for at least 10 years, you would choose a life and 10 years certain annuity. This way, you will get an income for your lifetime, regardless of whether you live two years or 200 years. But, if you die before 10 years is up, your beneficiary will collect for the remaining timeframe. So, if you pass away after two years, your beneficiary will receive an income for eight more years.          


Deferred Annuities

These annuities don’t provide an income stream immediately. They are designed to grow your nest egg. At some point down the road, you can turn them into an income stream by converting them to an immediate annuity or by adding a lifetime income benefit rider. We will cover that later.

There are three types of deferred annuities:

  1. Fixed

  2. Variable

  3. Fixed indexed


Fixed Annuities


Fixed annuities are similar to CDs. They don’t lose money. Insurance companies promise to pay a specified interest rate for one year, or for multiple years, called multi-rate guaranteed annuities. After the initial guaranteed period is up, the insurance company will declare the rate they will pay for the coming year. But this rate will never be lower than a certain guaranteed minimum. For example, say an insurance company offers a product that has a rate of 3% for the first year, and a minimum guaranteed rate of 2%. That means that for the first year, you will get 3%. The second year, you may get 3%, or something higher or lower than that, but definitely not lower than 2%. Fixed annuities also carry a surrender charge typically. This means that for a certain number of years, usually five to 10, you will get hit with a surrender penalty if you withdraw your money. Usually, however, the insurance company will allow you to withdraw up to 10% of your money after the first year without a penalty.


Variable Annuities


Variable annuities are similar to mutual funds. They fluctuate up and down depending on what the underlying investments are doing. They offer a handful of sub-accounts that invest in a variety of stocks, bonds, and sometimes even real estate and commodities. Variable annuities also come with a death benefit. This means that the insurance company will give your beneficiary a certain amount, often equal to the amount you originally invested, if something happens to you. For example, let’s say you invest $100,000 into the annuity, and it drops to $50,000. Just when you think it couldn’t get any worse, it does—you die. Because of the death benefit, the insurance company will give your beneficiary $100,000, not $50,000. As you can imagine, the insurance company doesn’t do this out of the kindness of their heart. They charge you for this, which is called a mortality and expense charge. In addition, you will incur management fees for the investment sub-accounts as well. Variable annuities also have surrender charges just like fixed annuities and fixed indexed annuities.     


Fixed Indexed Annuities          


Fixed indexed annuities are a hybrid annuity. They combine aspects of the fixed and the variable annuities. They are similar to fixed in the sense that you can’t lose money. However, your return will fluctuate. These annuities track an underlying index, such as the Standard and Poor 500.

The insurance company gives you the option of determining how you want to track the index. The most common way is to give you the index’s return, up to a certain amount called a cap. Let’s say you choose the Standard and Poor index with a 5% annual cap. If the market does 3% for the year, you will get 3%. If it does 10% for the year though, you will get the cap of 5%. But, if the market goes down 10%, you won’t lose any money for the year. These annuities also come with surrender charges, and they can last from five to 20 years.    

Many of the variable and fixed indexed annuities sold today have something called lifetime income benefits. These benefits can be added as a rider to the annuity for an additional cost. They give the primary benefit of an immediate annuity, which is a guaranteed lifetime income. But, they come without the primary drawback of an immediate annuity, which is the lack of liquidity. Every company has their own spin on these riders. But, the concept remains the same. During the deferral period, your account value grows based on the sub-accounts it is invested in or the indexes it is tied to. When you want to turn on the income stream, the insurance company calculates how much income they can give you for life. This is guaranteed, and may increase if the investments continue to grow. Often, the insurance company will make sure that your account value grew by at least a specified amount, say 5% per year. If at any time you decide you want the lump sum, you can stop the income stream and withdraw whatever remains in your account. 

As you’ve probably gathered, annuities are complex investment vehicles. Just like any other insurance contract, research is required so that you can make an informed decision. Hopefully, I’ve shed some light on the basics.



                  INDEXED UNIVERSAL LIFE  (IUL)


We’d like to state right up front that one primary con to getting indexed universal life vs term life is price. If, for example, you are a person with less than $50 in disposable income after all your mandatory bills are paid, but still need life insurance protection, level term life insurance might be the better option.

However, if you are part of the majority of the country that is looking for protection, stability, growth, and tax advantages for your retirement – keep reading. An indexed universal life insurance policy may be exactly what you need to secure your financial future. And even if you think that you are probably not the ideal candidate, you owe it to yourself to know the facts so you can see for yourself.


10 Top Pros of Indexed Universal Life Insurance

  1. Death Benefit

  2. Cash Accumulation

  3. Gains are locked in

  4. Protection against market loss

  5. No Mandatory Distribution

  6. Upside Growth Potential

  7. Tax Deferred

  8. Access Cash Value at any age

  9. Does not impact Social Security Taxation

  10. Disability Rider


#1) Death Benefit

Above all else on the list of indexed universal life insurance pros is the Death Benefit. IUL is a permanent life insurance product and ultimately the thing you are insuring (your life) is of utmost importance. Hopefully we can all agree on this point. Money will never be able to replace the loss of a loved one, but avoiding the double-whammy of a family death and massive financial hardship is significant.

I still remember the day my policy went into effect. The joy of knowing that my family would be covered if something happened to me was a tremendous feeling. I was actually amazed that I could get such a large policy for such a great price.

I think many people wander around ignorant of the need for life insurance policy, but once they are educated and see their own need, there is usually a tremendous sense of urgency that is only relieved by getting covered. 

LTC Rider

An additional benefit that many people are taking advantage of is a life insurance with long term care combination policy. Also known as hybrid life and long term care, these policies provide all the benefits inherent in life insurance, but with the additional benefit of long term care protection.


#2) Cash Accumulation

If the number one benefit for an IUL is the death benefit, the number two reason could probably be considered #1 for those that live long enough to enjoy retirement – cash value accumulation. Your cash value grows according to either a Fixed Account Value or Index Participation Rate. There are pros and cons to each crediting method.

An IUL is a permanent life insurance policy that has a cash value (CV) and allows for cash accumulation inside the policy. This cash value grows over time as the individual pays into the policy. The cash value can always be accessed and used as you see fit.

In addition, policy withdrawals are tax-free, up to the amount of premiums paid, because the premiums were paid in after-tax dollars.

And don’t forget that you can also access the growth of your account tax-free, by taking a policy loan (sometimes called a swap loan) against your cash value.

For those with a lot of extra cash to invest each year, there is a limit to the amount you can pay into the policy (typically a percentage of the total policy value). Companies want to make sure you remain below the point where the IRS would consider the insurance a fully taxable modified endowment contract or MEC. So keep that in mind if you’re thinking this could be a tax shelter for your tremendous horde of cash in the basement.


#3) Gains Locked In

Another great pro of Indexed Universal Life Insurance is that each year the gains are locked in or captured. In other words, every year your gain will be secured along with your previous cash value total. Each year’s credited interest is locked in on the Index Crediting Date. From there, the company sets a new starting point called the “annual reset”. All interest credited during the prior period is locked in and will not be taken away due to negative index performance.

To fully understand this let’s look at your money if it were not in an IUL, but instead invested in the market.

Just as there are indexed universal life insurance pros and cons, there are pros and cons to being invested in the market. The pro to investing in the market is that you can reap any and all upside growth, and even without selling you can benefit from dividends that companies issue to stock holders.

The con to investing in the market is that you can also reap any and all negative returns, and negative returns can wipe out all previous gains combined. In other words, you can lose all your money. It may be unlikely, but it’s possible.

So what about the IUL?

Within an IUL your insurance company does not invest your cash value in the stock market for you. Instead they give you a return based on the market index performance, called theIndex Participation Rate. In addition the return has some limits.

The policy will spell out the limits, but currently many of the IUL providers are setting limits in the low teens for the maximum, and around 1% for the minimum.

This means that you’ll never get more than the Index Cap Rate maximum of 13% (or whatever the max limit is for your policy) when the market index exceeds that amount. It also means that you’ll still get 1% when the market index drops below zero and has a negative year.

Keep in mind that it also means that you will not get any dividends from your investments, like you would if you were actually investing in the market. But I would argue that it is a small price to pay for the peace of knowing that each year my gains are locked-in and will not go away.

Recently I’ve heard of some rather shady policies being written that allowed for the minimum to be attributed over a period of years, instead of annually. So in essence you could have two positive years, and then two negative years, but they would still give you the “average” of at least 1% over a total of 4 years. I’ve never seen a policy like this, and I suspect that they are very uncommon if they’re out there at all. Regardless, you should always work with a reputable company and ask questions when applying. I’ve never written a policy with anything other than an annual guarantee.


#4) Market Loss Protection

One of the most discussed indexed universal life insurance pros is the protection against market loss. As mentioned earlier, the locked-in gains are fantastic, but those can only be accomplished by protecting against a market loss. So the two provisions work hand in hand. The insurance company will provide you with a guaranteed minimum amount that will be attributed to your cash value. Typically the guarantee is around 1% and is attributed annually.

What this means for your cash value is that when there is a horrible year in the market, or even just a year in which the markets drop below zero, the amount that will be attributed to your cash value is the guaranteed minimum, called your Index Floor Rate. In a market that is volatile or significantly bearish (down) the minimum guarantee protects your cash value and keeps you on track toward your financial goals.

Now I’m sure there are situations in which an insurance company went bankrupt and a guarantee wasn’t met, but those situations are the exception rather than the rule. And state governments take over when these situations arise so it’s not like you will lose everything. In fact you are likely to find yourself doing just fine but with a different insurance provider.


#5) No Mandatory Distribution

When you get ready to retire, there is no mandatory distribution in an IUL. If you have an IRA or 401(k) you’ll have to start taking distributions (withdrawals) from your account sometime after you turn 70.

I’m sure you know already, but the reason for this mandatory withdrawal is because the IRS can’t tax that money until you start to take withdrawals. That account is tax-deferred, not tax-exempt.

This may not seem like a big deal to you when you read it, but if you’re trying to build your retirement account while you or your spouse is still working, these mandatory distributions can seriously slow your progress.

Indexed Universal Life has no such mandatory distribution requirement. If your spouse is working and you are retired, you can live off the employment income and let your cash value grow and grow without taking out any money. (If you have a 401(k) and you are still working after reaching the age limit, you can delay the distributions, but only until you stop working, then it becomes mandatory)


#6) Upside Growth Potential

The Indexed Universal Life policy has serious upside growth potential (consider an IUL for estate planning when funding an irrevocable life insurance trust).

This is a big deal because it means that you don’t have to be in really risky stocks in order to get some of the benefit of a great bull (up) market. If the market index that your policy is tracking increases 10% in a given year your account will be credited around 10%. If the market index increases 20%, your account will be credited with the max or cap, which is currently around 13% for most policies.

Back in the 1990’s when the stock markets were going crazy and everything seemed to be making a return of 10%, 20%, and even higher, the insurance companies had to provide a product that would allow for some upside gain in great years. The IUL was the answer and the cap rate came into being. The additional % that the market index returns above the cap is used to make up for the years in which the company has to cover the losses of a negative year and give the minimum guarantee.

All in all it seems like a fair trade-off for those of us that aren’t looking to win the lottery in one year, but also want to protect against giant sell-off years.

Further, although purist of the concept might argue on dividend paying whole life insurance works, using an IUL to practice the infinite banking concept can further catapult your total upside growth. If your not familiar with this concept please take a moment and get familiar. It can be life altering in the hands of the right person.


#7) Tax-Deferred

Indexed Universal Life is a tax-deferred policy. Similar to that of a 401(k) or an IRA, but different in many significant ways (some of which I’ve already mentioned above).

If you choose to build up your cash value in an IUL and use the protection during your working years, the policy will act much like any other tax-deferred product. The cash value will grow and you will not pay tax on the growth in the cash value. If you happen to close the account (not recommended) or take withdrawals instead of policy loans, you will pay taxes on the growth.

However, unlike the IRA and 401(k) accounts, there is a way to access the cash value tax-free without incurring any penalties. In addition, you can always withdraw from your cash value up the amount of the premiums paid in without being taxed because those premiums were paid in after-tax dollars.


#8) Access Cash Value

With an IUL you can access your cash value any time you want (during business hours of course). Or more precisely, you can access your cash value at any age you want. You do not have to wait for some pre-determined required age to have access to your account.

Many tax-deferred retirement accounts have an age restriction of 59 1/2 before you can access the money. If you withdraw ahead of time there are penalties and restrictions.

Another indexed universal life insurance pros is that you can access your cash value at any age without restriction. I don’t know about you, but I prefer to have zero limits on accessing my own cash. With an IRA you do have some stipulations for emergencies, and age distributions, but even so they seem very limiting comparatively to an IUL.

And another thing to be aware of is your policy loan does not have to be paid back. This provides maximum flexibility. Loan interest is charged in arrears and unpaid interest is added to your total loan balance.


#9) Social Security Taxation

You don’t have to worry about Indexed Universal Life impacting your Social Security taxation. Many people don’t know this, but the money you make from Social Security in retirement, may be taxed as income. The income from an IRA might just put you over the limit (currently $32k if filing jointly, or $25k if filing as an individual) and therefore cause your social security to be taxable.

Let’s say for example you get $24k a year from Social Security, and you take another $40k from your IRA each year. If your house is paid off and you don’t have any other write-offs, you may find yourself in a situation in which the Social Security benefits are taxable, and you’re in a higher tax bracket.

If instead of an IRA you had an IUL policy loan for 40k per year, your taxable income would be zero because you would be under the base limit. For an individual or family that is living on less than $80k per year, you may find that your annual tax savings are in excess of $10k. That’s a big deal. For those making more, your savings would be even greater. That’s a bigger deal.


#10) Disability Rider

The final benefit of our indexed universal life insurance pros and cons list is one that is actually an additional life insurance rider on most policies – the disability rider. The disability rider will continue to pay the premiums, and keep the policy in effect, even if you are permanently disabled.

In some cases, the rider will actually pay the amount you were currently paying at the time of disability (so if you were over-funding, the rider would match). Usually the additional amount of premium to add this rider is extremely affordable considering the possible benefit.

With this rider, you can become permanently disabled and the insurance company will start paying your premiums for you. Just think about that for a minute, and tell me if you know of any other retirement account out there that will do something similar? I couldn’t think of any.

A disability rider is a great choice when considering setting up a business succession plan, such as a buy-sell agreement funded with life insurance or key man life insurance.


Indexed Universal Life Insurance Cons


#1 Price

The first indexed universal life con is price.

There are no two ways around it, you will pay more for indexed universal life than you will with term life. At least initially. Overtime you will accrue cash value in your policy that should make your policy more efficient.

What do I mean by efficient?

As your policy’s cash value grows, your net amount of risk goes down. So as your total cost of insurance increases as you age, the company is only looking at the part of your policy that represents risk to the company.

So this means that an IUL policy that has ever increasing cash value has a lower net amount of risk. And this lower net amount of risk keeps your premiums in check.


#2 Diligence

Another indexed universal life con would be the amount of care you have to take in maintaining your policy is going to be greater than with whole life insurance or term life.

Level term life is easy to maintain because you pay a fixed premium. Now when the initial term expires all best are off. But initially, the fixed premiums make term life simple.

Whole life is also easier to maintain because of the guarantees offered, particularly the guaranteed fixed premiums. You know what you have to pay and it takes a lot of variables out of the equation.

With an IUL, your premium can rise or fall depending on how you fund your policy and how your policy performs. It may be that you find yourself not having to make premiums for a time or you may find that you have to make huge premiums to keep the policy from lapsing.

Now that is the extreme scenario, but the fact remains you have to be more diligent with indexed universal life or risk it blowing up on you.



As you can see, an Indexed Universal Life Insurance policy offers some great benefits. I already mentioned that you might not be the right candidate if you happen to meet certain rare criteria, but if you happen to be in the majority, or just want to talk about what your options might be, please give TermLife2Go a call  and we’ll present you with all the options, so you can make an informed choice on your own.

© 2023 by Lion Heavy Gear. Proudly created with