Life Insurance, Term Life, WL, IUL, VUL
October 8, 2020

Roth vs IUL, Part 1: Intro

Did you see advertisements of cash-value life polices, in which they are compared to Roth IRA?

Sometime, the following names are used:

  • Super Roth
  • 501k plan
  • TFRA (Tax-Free Retirement Account)
  • MFTA 101a (Maximum Funded Tax Advantaged life insurance)
  • LIRP (The Life Insurance Retirement Plan)
  • MPI (Maximum Premium Indexing)
  • Premium Finance Life Insurance
  • Bank on Yourself
  • Infinit Banking

In the series of posts we are going to introduce IUL (Indexed Universal Life) insurance, and compare it with Roth. Step by step.

Roth IRA/401k

Two types of retirement plans: IRA and 401k support Roth-accounts, which let after-tax contributions to growth tax-free. Qualified withdrawals, which typically require reaching age 59.5, are tax-free as well.

Capital inside Roth-accounts could be invested into securities (stocks, bonds, mutual funds, and ETFs) or into bank products (like, CDs). Nowadays most brokers allow trading (buy/sell) securities without (or with minimal) fees.

The typical cost (expense ratio) of index mutual funds and ETFs could be as low as 0.20%. Some well-known index funds may have expense ratio of 0.03% or lower.

IUL — Indexed Universal Life

IUL is a type of Universal Life (UL) policy, in which accumulated cash-account is credited based on increases in an equity index (e.g., S&P-500, Nasdaq, etc). Typically, IUL protects the account agains market downturns and at the same time limits the account growth. For example, the min and max caps could be 0% and 13%.

Usually, IUL policy consists of Annual Renewable Term (ART) insurance supported by the cash-value sub-account. Premiums (client contributions) cover the cost of ART, and the remainder is accumulated inside the cash account.

IUL policy offers tax-deferral cash accumulation and growth. Taking loans against cash-account is not taxable event, unless the policy lapses.

IUL policy has high fees, part of which are driven by covering the Net Amount at Risk (NAR). NAR = Death Benefit - Cash-Value. Keeping NAR as minimum as possible, either by overfunding the policy or by reducing the Death Benefit, helps to reduce the fees.