“Life Insurance is the biggest benefit in the IRS tax code because the money comes out tax-free and there is no limit to this tax break. Life Insurance is the best way to leverage money and too, the single best way to leverage the tax code to build real wealth that is free and clear of taxes. Tax-Free money, wow.” Ed Slott, America's IRA Expert

In this episode of Money Script Monday, Kyle presents IUL as a unique financial vehicle that can help build, sustain, and transfer wealth in the most tax efficient manner.

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Video transcription

Welcome back to another episode of Money Script Monday.

My name is Kyle Tomko, and we're going to be talking about a hot new topic, Index Universal Life versus the Roth IRA, and where you should place your money.

Now, most people viewing this today probably have funded or continue to fund the Roth IRA, including myself, and some others have been phased out from contributing to a Roth IRA at all.

It's my goal today to educate you on the differences and the similarities between these two vehicles, and to introduce IUL as a Roth alternative for all wage earners to help build, sustain, and transfer wealth in the most tax efficient manner.

So, the question remains, which one is best to me?

That question relies on a couple of different factors, your age, your health, your savings ability, and your annual income.

Because these two vehicles serve two different purposes, let's first begin with some of the similarities.

IUL vs. Roth IRA

Similarities

Let's take this to the board, and as you can see, the Roth IRA and the IUL are both funded from after-tax proceeds.

We like to say that the tax was paid on the seed compared to the harvest.

Both grow tax-deferred, and both can be accessed tax-free.

There is no required minimum distribution ages, so you can delay past seventy and a half, and the money that you put into the policy can be accessed pretty much at any point.

Differences

Now, let's talk about some of the differences.

An IUL is a perfect dual-purpose strategy for those high income earning individuals.

An engineer for example, who are looking to maximize their tax-free retirement income, and also have that insurance component, in case you did pass away early, that you can leave to your heirs.

One of the first items on this board is market protection. As you'll notice, IULs are not invested directly into the market.

It's what we call indexing, where the insurance carrier is allowing you to participate in market equity-based returns, but not participate in the volatility and the downside risk.

How are they able to do that? That's through the use of indexing, as mentioned, where the insurance carrier is going to purchase options on the market tied to the index that you've chosen.

One year later, they'll call on that option, if that value is higher, and credit your policy accordingly.

It's very important that these are fixed contracts, are able to earn equity-based returns without risking that principle, which will touch upon a little bit sooner.

No contribution limits.

This is huge for those ultra high net worth, those high-income earners that have been phased out from a Roth IRA and can pretty much fund into these policies as much as they possibly can.

The caveat to that is that it can only be over a structured period of time.

Unfortunately, it will not take a single premium. By doing that, that would create a modified and dominant contract.

We don't want to do that because we'll lose all these benefits that we talked about earlier.

Principal protection, as alluded to with market protection.

The insurance carrier's going to receive 95% of your premium, put that into the general portfolio, which is composed of highly-graded AAA investment bonds.

Ultimately, you're going to be whole at the end of the year, they're going to take that other portion and purchase options on the market providing that upside potential.

Keep that in mind. Your nest egg money will always be safe.

Favorable access to cash value, this is huge. Essentially, you're able to be your own bank.

The wealthy understand it, and you should too, where you're able to take out loans from your policy as it's still participating tied to the index.

So, if we're being charged 5% and we're earning 7%, we're able to create that net positive gain of 2%.

Where we are able to create that sustainable income stream that will never outlive.

Then tax for your survivor benefit. The question is, would you rather leave your money with your family or with the IRS?

In addition to this, this is a great way to protect from estate future tax hikes and increases. So keep that in mind.

Let's now go over to the Roth IRA. What purpose is this?

This is more of a single purpose.

This is for your lower income earners, your middle-class income earners who are looking for retirement planning.

That anticipate the tax rates going to be higher in the future and looking to stash away a couple of thousand dollars a year and hopefully have enough in retirement to tap into.

Market exposure. Unlike indexing, you're tied to the volatility in the market.

You're tied to those stock market crashes, which typically occur every seven years.

Now, I'm not bashing Roth IRA. I think it's a great alternative for most, I have one myself that I'm contributing to.

But, if you can stomach that those losses, you know, it could be a good opportunity for you.

Contribution limits. This is where it becomes a little bit concerning.

Depending on your age, you can only contribute up to a maximum amount. If you're under age 50, it's $6,000, and if you're above age 50, you can actually increase that to $7,000.

But still, it's limited. If you're high-income earners, that's not going to do anything for you in retirement.

You have to look at certain alternatives and placing your money.

Principal risk exposure, unlike that insurance carriers general account yield you vest in the market, that's 100% exposed to the ups and down, as you know.

Annual income limits, there's discrimination with the IRS, they think that if you make over a certain amount of money, single, it's $122,000.

They begin phasing you out, and if you're married it's $193,000, where you begin to get phased out from contributing at all to a Roth IRA.

That leaves the wealthy without any way to accumulate and grow and access your tax-free money in retirement.

Typically, the next option is funding your 401(k). And looking at REITs, private equity, buying direct real estate purchases.

The common thing about those vehicles, there's no tax protection.

So, what if there was an alternative for those high-income earners, an IUL is a great solution for you.

Early withdrawal penalty, similar thing here, you can't access your money until fifty-nine and a half.

You do have basis at any time. But if you did want to take out earnings, you would have to wait until age fifty-nine and a half.

Now, there is an exception, what we call the five year rule where that money has been season for five years inside a Roth:

• first time homebuyer
• medical expenses
• death and it gets passed on your heirs
• educational expenses

You are able to tap into those earnings and to access that free of any taxation, or at the 10%, or the withdrawal penalty.

Real-Life Scenario

We walked through some of the similarities and differences. Let's talk about a real-life example.

I'm going to show you kind of the proof in the pudding and how an IUL would compare to a Roth IRA, assuming the same premium, the same interest rate, and the same income distribution schedule.

Let's get into that now.

At age 50, he's in great health, he's an engineer, and for apples-apples purposes, I took the $7,000 Roth IRA annual contribution limit, and I assume that both inside a Roth and inside an IUL.

What you'll notice here is that the day one death benefit, although we're not structuring these for death benefit, there is that insurance component that they'll have access to if they do pass away, and that's $130,000.

That death benefit for the Roth is essentially just the cost basis they put into the policy.

From death benefit features the IUL wins.

Age 70 death benefit, I'll, again, restructure this for cash value design a minimum increasing face to optimize the cash value potential.

We still, right before we take income, if we did pass away, there is still about $30,000 to $40,000 more that your heirs would receive compared to that Roth IRA.

Which is again, built in with the premium that you've put in and any earnings on top of that.

Age 70 tax-free income. This is if we took the same income distribution for both accounts, and how much would that be?

It's about both equal at $22,359.

But the question is, how long are we able to take out that income and create that sustainable income stream that we will never outlive?

What you'll notice in this next line here is, at age 95, we collect far more, a little over $200,000 more of cumulative tax-free income because of that favorable way of accessing the cash value.

What you'll notice here is that that Roth IRA can't keep up with that income stream and actually drains out, in this example, at age 84.

Lastly, net of any loans inside the contract at life expectancy, age 95, how much can we leave to our heirs as a thank you?

That Roth because it drained out so early, there's zero tied to the account.

In this example and the IUL, we have $96,000 that we can pass on tax-free, probate-free to our heirs.

Hopefully, that gives you a good example.

Now, keep in mind that you can fund a lot more into this IUL for those high-income earners, so you don't have that cap potential.

Hopefully, you took away some similarities, some differences. You saw a real-life example.

I'm going to leave you with a quote from America's IRA tax expert Ed Slott. You may have heard of him.

He said, "Life insurance is the biggest benefit in the IRS tax code and is the best way to leverage money and build wealth. Money comes out tax-free, and there is no limit to this tax break."

I want you to sit on that and remember that IUL could be an alternative to all wage earners who are looking to supplement their tax-free retirement income.

Hopefully, you've enjoyed, and we'll see you next week on Monday Script Monday.