Taxes Prove I’m Wrong About IUL as an Asset Class

By: Roccy DeFrancesco, JD, CAPP, CMP

Below I’m going to go through some examples that many of you will not believe. To download the verifiable numbers from the 4-different examples, click on the following link:

Not yet familiar with how IUL works?

If not, just read my book Retiring Without Risk.  You’ll get the math as to why an IUL can generate more after-tax cash flow in retirement than a taxable brokerage account. Click on the following to download the book for FREE:

I’ve been WRONG! I’m embarrassed to say that my math for the last 20+ years on using IUL as an asset class has been WRONG!

How can that be? I’ve significantly underestimated the annual tax-drag in brokerage accounts.

New tax-drag research—I’m doing research for a new project which led me to dig into the real numbers when it comes to the annual tax-drag in brokerage accounts. I was stunned at what I found. The following numbers are the “ANNUAL” TAX-DRAG on mutual funds (going back ten years).

Mutual funds 1.52%
Index funds 1.41%
Top 25 highest returning mutual funds of all time 1.84%

The mutual and index fund data is for large blends and came from YCharts and the top 25 mutual fund data came from Morningstar. The top 25 article was from Kiplinger from 2019. These numbers also assume the client is in the highest tax bracket. If in the 25% tax bracket, reduce the tax-drag by only 16%.

A mutual fund that returns 8% really only returns 6.48% due to taxes.

IUL is a tax-free wrapper—the reason IUL can work as a nice retirement cash flow tool, even though there are insurance expenses, is because there is NO TAX-DRAG.

Example—let’s look at where my math was wrong in an example and let’s look at math that is more accurate. Let’s start with the typical example I’ve used for years.

  • 45-year old male
  • $15,000 a year premium every year into the IUL for 20 years
  • 6% annual rate of return
  • Tax-free cash flow from 65 for 20 years

Brokerage account variables:

  • ONLY 0.7% as the annual tax-drag
  • 1.2% mutual fund fee
  • NO money management fee or wrap fee

20-year retirement cash flow comparison:

$47,069 = IUL annual tax-free cash flow

$28,821 = after-tax cash flow from the brokerage account

$18,248 = annual difference in after-tax cash flow ($364,960 over 20 years).

FYI, if I increase the gross brokerage account return to 8%, the cash flow = $43,199 a year.

Same example but with more a more realistic tax-drag of 1.5%.

$24,297 = after-tax cash flow from the brokerage account.

$3,804 less a year when I use a more realistic number for the annual tax-drag.

If I increase the gross brokerage account return to 8%, the cash flow = $36,699 a year.

So I was WRONG! (But in a good way). I’ve been underreporting the benefits of an IUL as a tax-favorable retirement cash flow tool.

What can you learn from this newsletter?

  1. My guess is that you’ll be shocked at the tax-drag on the average brokerage account.
  2. Many readers who don’t know the math of using an IUL as a retirement tool should now have a better feel for it (and hopefully will want to learn more).
OnPointe IUL Comparison Software

Because most IUL comparison software in the industry is either not very good or accurate, I added a module to our OnPointe Risk Analyzer software to illustrate comparisons between IUL and brokerage accounts and tax-deferred 401(k) plans, IRAs, and defined benefit plans.

To learn about our industry-best software, click on the following link or image below: