Is MECing an IUL Policy Better than Funding an FIA?
Chances are high you’ll want info on the IUL (indexed universal life) policy I used for my examples below. To sign up to learn about one of my favorite IULs, click on the following:
I last ran this article in 2010 when caps on FIAs (Fixed Indexed Annuities) were at all-time low. Caps today are now below the 2010 all-time rates so I thought I would reboot this article.
More and more advisors are using FIAs as an asset class. Why?
- They have no risk of loss (money can’t go backward due to negative market returns)
- Gains are locked in every year (which can never be lost)
FIAs a no-risk asset class that should return 3-6% over time depending on the product.
The question for this newsletter is:
Can a MEC’d IUL be a better tax-deferred option than an FIA?
MECing an IUL intentionally—it usually makes no sense to MEC a cash value life (CVL) policy. When you MEC a policy you CAN’T take tax-free loans.
Even so, the article compares an IUL policy that is a MEC where the death benefit is run at the DEFRA/TEFRA minimum to an FIA. Both are treated the SAME when it comes to removing money from the policy (gains are taxed at your ordinary tax rate).
FIA vs. IUL Caps—FIA caps on S&P 500 based products are running under 6% for an annual pt-to-pt product (like I said they are low right now). Most IUL caps on S&P 500 based products are running under 12%. One company (one of my favorites is at 13.5% for an annual pt-to-pt product.
FIA vs. IUL for retirement income
I’m going to run a few different examples to drive home these numbers.
- Single premium IUL (MEC) with loan
- FIA with guaranteed income benefit (GIB) rider
- FIA without a GIB where I just take withdrawals
Example 1—a 55 year old male who has $250,000 in CDs he’d like to have grow over the next 10-years. I’ll use a 4% ROR in the FIA, a conservative 6% ROR in the IUL, and an FIA with GIB rider. Cash flow will start at age 66 for 25 years.
What’s the ANNUAL per-tax- cash flow?
- IUL $37,182
- FIA with GIB $25,533
- FIA taking withdrawals $22,777
The IUL was $11,649 a year more than the FIA with GIB ($291,225 more over 25-years).
Example 2—same except I’m going to assume a 6% ROR in the FIA and 7% return in the IUL.
- IUL $44,288
- FIA with GIB $25,533
- FIA taking withdrawals $33,041
The IUL was $11,247 more than the FIA taking withdrawals ($281,175 more over 25-years).
FYI, an IUL with ONLY an 11% cap generated a ROR in excess of 7% going back to 2006.
Death benefits? The IUL has a death benefit of $150,125 at age 85 with a 6% ROR and $176,206 with a 7% ROR. So, the EXTRA death benefit is a huge plus for the IUL over the FIA.
An FIA has no death benefit. But, if you used an FIA with a GIB rider and the client lives past age 85, it will keep paying. In my example, there is no more money to be taken from the IUL.
LTC Benefits? Most FIA typically won’t have any. The IUL has a FREE chronic illness rider thereby giving the client a form of LTC protection.
Advisor Compensation? Commissions are HIGHER with the IUL than FIA.
- If we assumed the FIA pays 7% 1st year commission, that’s $17,500.
- The IUL total 1st year commission is $21,176.
Conclusion from this newsletter?
It’s impossible to give the “best” advice to clients if you don’t know “all” the product AND how to use them to your client’s benefit in multiple situations.
Virtually no one thinks to MEC an IUL and to use that as an alternative tool to help generate cash flow in retirement. Now you know it is a viable tool an alternative using an FIA for certain clients.
Roccy DeFrancesco, JD, CAPP, CMP
Founder, The Wealth Preservation Institute
Co-Founder, The Asset Protection Society