Beyond the 401(k): How IUL Can Be Used for Tax-Free Retirement Income

When you think of retirement savings, you probably think of a 401(k) or an IRA. These are fantastic, essential tools. But what if there was a way to supplement that savings, protect your family, and create a source of tax-free income in retirement?

Enter Indexed Universal Life (IUL) insurance. It’s a powerful financial tool that combines a permanent death benefit with a unique, tax-advantaged cash value component.

What is an Indexed Universal Life (IUL) Policy?

An IUL is a type of permanent life insurance. A portion of your premium pays for a death benefit (which protects your family), and the other portion builds cash value.

Here’s the key difference: The cash value growth in an IUL is linked to the performance of a stock market index (like the S&P 500).

• You get (some of) the upside: When the market goes up, your cash value is credited interest, allowing it to grow (up to a “cap” rate, e.g., 9%).
• You are protected from the downside: When the market goes down, your cash value is protected by a “floor” (usually 0%). You don’t lose money due to a market crash.

How IUL Creates Tax-Free Retirement Income

This is where the strategy comes in. The cash value in your IUL grows tax-deferred. You don’t pay taxes on the interest it earns each year.

But the real power is how you access it. When you retire, you don’t withdraw the money (which could be taxable). Instead, you take tax-free policy loans against your cash value.

Here’s the flow:

1. Build: You fund the IUL during your working years, building up a large cash value.
2. Borrow: In retirement, you take tax-free loans from the policy to supplement your 401(k) and Social Security income.
3. Pass On: When you pass away, the death benefit (which is also tax-free) is used to pay off the policy loans, and the remainder goes directly to your beneficiaries.

IUL vs. 401(k): A Partnership, Not a Replacement

An IUL is not a replacement for your 401(k), especially if you get an employer match. It’s a supplement—a “bucket” of tax-free money that gives you incredible flexibility in retirement.

• In a “down” market year, you can pull income from your IUL instead of selling your 401(k) assets at a loss.
• It provides a death benefit, something your 401(k) and IRA do not.
• It protects you from future tax rate increases, as the income is tax-free.

Is an IUL Right for You?

An IUL is a sophisticated tool. It’s ideal for individuals who are already maximizing their 401(k)/IRA contributions and are looking for another long-term, tax-advantaged way to build wealth and protect their family.

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Want to see if an IUL fits into your retirement goals? Let our team of financial service professionals provide a free, no-obligation illustration.