Taxes Prove I’m Wrong About IUL as an Asset Class
Roccy DeFrancesco, JD, CAPP, CMP
In my article, I had an example of a 45-year old who could fund a brokerage account to build wealth vs. an IUL (although my opinion is to take a multiple bucket approach to building wealth where IUL is just one of several buckets).
$15,000 a year in premium into the IUL and to fund the brokerage account. 6% rate of return and cash flow for 20 years starting at age 65 (IUL cash flow is tax-free and the brokerage account cash flow is net of taxes).
Brokerage account: 1.2% mutual fund expense but NO money management fee.
The big variable and the reason for the newsletter is the tax-drag annually on the brokerage account. For years I’ve used a rate that was too low. After really digging into the research of what is typical, I came to the following conclusion for the average tax-drag:
- Mutual funds* 1.52%
- Index funds* 1.41%
Download the following two examples and review the numbers yourself:
- Mutual fund comparison where I only use a 0.7% tax-drag
- Mutual fund comparison where I only use a 1.5% tax-drag
Click here to download the comparison for 1) and click here to download the comparison for 2).
For those who want to say that a brokerage account should return more than the 6% I illustrated, first I’d say that the IUL (using historical numbers) should be in excess of 7%, but I like to illustrate it in a conservative manner.
I ran a second set of numbers using the same tax-drag as 1) and 2) above, but used an 8% gross rate of return.
Click here to download the comparison for 1) and click here to download the comparison for 2).
The bottom line is that if you understand fairly basic math, it’s tough to argue that IUL is an asset class that should be considered for clients under 60 and one that is a nice tax-hedge to protect clients from increasing taxes.
*The mutual and index fund data is for large blends and came from YCharts.
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