The main source of retirement income for Americans is via use of a 401(k). However, there is another option that should be considered when stashing your cash for retirement. An indexed universal life insurance plan (IUL for short) is a life insurance policy that can help maintain and grow wealth with less of a risk that a 401(k) brings. With the ability to use variable loans to take out money, the rules and regulations of an IUL differ from that of a 401(k). Here are three of the major benefits of an IUL to help maintain and grow your wealth upon retirement.
Earn interest on loans
Perhaps the most beneficial aspect of an IUL being used for retirement would be earning interest.
As opposed to a 401(k), an IUL earns interest on the entirety of the funds in the policy, even when a loan is taken out.
For example: David has $750,000 in a 401(k), and he elects to take out $50,000. Since this is taxable income, David can only earn interest on the $700,000 remaining in the account.
However, William put $750,000 in an IUL policy. When he retired, he elected to take out a variable loan (explained below) worth $100,000. Despite William taking out a $100,000 of the policy, the IUL will still earn interest on $750,000 due to the money being distributed to the policy owner as a loan. Since a loan is something that is paid back over time, the IUL is considered to still have $750,000 in it.
Fixed rate, or variable loan?
When you are ready to start taking money out of an IUL, the most common method to do so is via a loan. There are two options to choose from when selecting the type of loan you are going to take out: fixed and variable. With a fixed loan, your interest rate stays constant throughout the borrowing period. With a variable loan, the interest rate fluctuates over time, giving you more flexibility on the repayment of the loan. However, the owner of the policy might not even have to pay it back.
When the owner of the policy passes away, the policy distributes a death benefit to the owner’s beneficiary. However, if the owner takes out money from the IUL in the form of a loan and then he/she passes away, the death benefit can be used to pay off the rest of the loan. Essentially, taking out money from a UIL doesn’t have to be paid back until the passing of the policy owner, where the death benefit will pay back the outstanding balances on the loans taken out.
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