There’s a savings plan that’s gaining popularity in the investment world. It’s even touted by a best-selling financial author.
Commonly known as a Max-Funded Option B Indexed Universal Life (IUL) plan, this investment is essentially a life insurance contract set up as a savings program. It’s established in the U.S. tax code under Section 7702(a), much like a 401(k).
8 Distinct Advantages
In his Amazon-best-selling book, “Everyone Ends Up Poor! Why Financial Planning is All Backwards and How to Fix It”, author Curtis Ray writes how an IUL is advantageous to investors—especially during down markets.
Benefits of this savings plan include:
- No loss of money in a down market
- Tax-free withdrawals can occur anytime without penalty
- Average 20-year compounded return of 69%
- No maximum contribution limit
- Lower costs than 401(k)s and IRAs, when invested for 10+ years
- No estate taxes, regardless how much money is left to heirs
- Asset protection in many states, including Illinois
- Life insurance
Protection During Recessions
Clearly, the best benefit of the life insurance contract is not losing money during a down market. IUL investors aren’t directly participating in the market, because returns are based on a contract with the insurance company. The security of not losing money is huge and positively impacts returns.
In the last recession from December 2007 to June 2009, for example, the market plunged over 35%. Investors in a 7702(a) plan didn’t lose money and experienced a net 14% gain during an improved market the following year. Most traditional market investors, meanwhile, were still digging out.
Since the Great Depression, recessions have occurred less than every 5 years on average. Avoiding the effects of these downturns is one of the main reasons IULs are so attractive.
Pluses Over 401(k)s, IRAs
In his book, Ray explains how you can spend proceeds from the IUL each year, preserve capital and never run out of money. In contrast, the generally accepted “4% rule” for spending down 401(k) and IRA funds assumes you’ll be out of money in about 30 years.
Ray, who is also chief executive officer of SunCor Financial, says the expenses of an IUL can be hundreds of thousands of dollars less than a 401(k) or IRA over the long term. This alone, according to the author and CEO, makes the universal life plan a better investment choice.
He notes that IUL plans received a bad reputation in the 1990s and 2000s because of high fees. Then, the plans were primarily used by the wealthy, but changes have now made them more appealing to the middle class.
Borrow, Reinvest Cash Value
Unlike other advocates of the Max-Funded Option B Indexed Universal Life plan, Ray calls out one more “patent-pending” approach to maximize the IUL’s potential. He suggests leveraging the investment by borrowing against the cash value of the policy and reinvesting it in the IUL.
The protection of not losing money in a weak market is the safety net of the strategy.
In most cases when borrowing the cash value, investors are charged a variable interest rate with a cap—but continue to realize the returns of the contract. An investor’s only risk is the interest on the variable loan, which is at or below market rate.
This reinvestment strategy can produce returns surpassing the S&P 500 average, Ray writes, and also offers the distinct possibility of double-digit returns.
Note: This article is for informational purposes only and does not constitute tax, legal, financial or investment advice. Any information provided in this article is based on sources believed to be reliable, but is not guaranteed by the Rainbow SIG Members of Mensa, Chicago Area Mensa or American Mensa, Ltd, and is not a complete summary or statement of all available data necessary for making tax, legal, financial or investment decisions. No information contained in this article or on this website constitutes tax, legal, financial or investment recommendations or advice.