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Freedom for Retirement™ is the podcast designed to help you move beyond the fear of the complexity of finances so you can be financially free to achieve personal significance. Tune in with Josh Duncan each week to turn fear into fuel that drives you into Freedom & Significance.
Welcome to the Freedom for Retirement Podcast. If you're a high earning professional, business owner, or someone approaching retirement and wondering whether you are truly on track, you are in the right place. This podcast is all about helping you make smart, confident financial decisions without the fear, confusion, or sales pressure that so often comes with money advice. Each episode is designed to break down complex topics like retirement planning, investing, taxes, and cash flow in plain English so you can understand what really matters and avoid the most common and costly financial mistakes. Everything you hear here is educational, fiduciary focused, and grounded in real world planning experience working with clients just like you.
Josh:I'm your host, Josh Duncan, partner at F5 Financial Planning. Let's get started. Are you worried that something being sold to you as safe retirement income might not be nearly as safe as it sounds? Maybe you have seen a presentation for indexed universal life insurance, often called IUL. The pitch can sound incredibly compelling.
Josh:Market upside, no market downside, tax deferred growth, tax favored retirement income, and a death benefit on top of it all for a high income earner that can sound like a perfect financial tool. You have already maxed out your four zero one k. You are looking for additional tax advantage strategies. You may be frustrated by market volatility, and then someone shows you an illustration that seems to solve all those problems in one neat package. But here are the questions I wanna ask.
Josh:What if the illustration you are looking at is not a prediction? What if the income shown on the page is not guaranteed? What if 0% floor does not actually mean you cannot lose money? And what if the biggest risks are not controlled by the market at all, but by the insurance company? I'm Josh Duncan, partner at F5 Financial Planning, where we take a fiduciary approach to maximizing our clients' wealth.
Josh:Today, we're going to talk about indexed universal life insurance when it is marketed as a retirement income strategy. We will cover how these policies actually work, why the sales illustrations can be misleading, what risk policy owners often do not understand, and what you should do if you are considering one of these policies or if you already own one and are concerned about its performance. This is not about saying every life insurance policy is bad. Life insurance can be an important planning tool when there's a real death benefit need. But using life insurance primarily as a retirement income vehicle is a very different conversation.
Josh:So let's slow down, unpack the moving parts, and help you make an informed decision. Before we talk about indexed universal life, we need to start with a basic principle. Life insurance is first and foremost designed to provide a death benefit. That means it's meant to protect people who depend on you financially, your spouse, your children, a business partner, special needs trust, or in a state that may need liquidity. In those situations, life insurance can be an incredibly valuable tool.
Josh:But when a policy is sold primarily as an investment, a retirement income source, or a personal banking system, we need to be much more careful. Here's a simple way to think about it. Imagine a bucket. The bucket is the life insurance policy. The water inside the bucket is the cash value.
Josh:Premiums pour into the bucket. Policy charges, insurance costs, and expenses drain water out of the bucket. Interest credits may add water back in. As long as there's enough water in the bucket, the policy stays alive. But if the bucket runs dry while you are still living, the policy can lapse.
Josh:That is a major issue, especially if the policy has loans against it. A common misconception is that if you pay the premiums shown on the bill, everything should be fine. But with universal life policies, that is not always true. The premium you are billed may simply be the scheduled premium, not the premium actually required to keep the policy on track for the original projection. That distinction matters.
Josh:The policy owner controls the premiums, but the insurance company controls many of the other important moving parts, including charges and interest crediting terms within the limits of the contract. So even if you pay exactly what you were told to pay, the policy may still underperform. And if the policy was designed around aggressive assumptions, underperformance can create a serious problem later in life when the options to fix it may be limited or expensive. Indexed universal life is a type of universal life insurance with an interest crediting method tied in some way to an index, often the S and P 500. But let's be very clear.
Josh:You are not investing directly in the S and P 500. You do not own the stocks in the index. You do not receive the dividends from those companies. You cannot decide to sell when the market is high. Instead, the insurance company uses a formula to determine how much interest, if any, gets credited to your policy.
Josh:And the most common structure is called an annual point to point crediting. That simply means the insurance company looks at the index value on one date and then compares it to the index value one year later. The other days during the year do not matter for that crediting period. If the index is down, a policy may receive a 0% credit. That is the famous floor.
Josh:But here's an important point. A 0% credit does not mean your policy cannot lose money. Why? Because policy charges still come out. Insurance costs still come out.
Josh:Administrative expenses still come out. So if charges are deducted and no interest is credited, your cash value can decline. That is why the phrase you cannot lose money can be very misleading. You may not receive a negative index credit, but your policy value can still go down after expenses. Now when the index is up, the amount credited to your policy is usually limited by several factors.
Josh:There may be a cap, meaning the maximum amount the policy will credit in a given period. For example, if the index rises substantially, the policy may only credit up to the cap. There may be a participation rate, which determines how much of the index gain you participate in. There may be a spread, which reduces the credited amount. There may also be bonuses or multipliers, which can make the illustration look better, but maybe not guaranteed and subject to change.
Josh:The key takeaway is this. The insurance company has levers. It can adjust caps. It can adjust participation rates. It can adjust spreads.
Josh:It can adjust certain charges subject to the contract, and those charges can have a major impact on long term performance. So while the policy may be connected to an index, the actual outcome is heavily influenced by carrier behavior. That is very different from owning a diversified investment portfolio. Now let's talk about illustrations. A life insurance illustration is supposed to show how a policy might work under certain assumptions.
Josh:It is not supposed to be a crystal ball. It is not a guarantee. It is not a prediction. But unfortunately, illustrations are often used as sales tools. A client may see a few polished pages showing large projected cash values and large projected retirement distributions.
Josh:Those numbers may extend decades into the future. The presentation may imply that the outcome is likely conservative or even dependable, but the assumptions underneath those numbers may be very aggressive. One of the biggest issues is linear return assumptions. In financial planning, we generally do not assume a portfolio earns the same exact return every single year for decades. Markets do not work that way.
Josh:Instead, we look at different sequences of returns, stress tests, and probabilities. But many life insurance illustrations assume the same positive crediting rate year after year. That can create a false sense of precision. A policy might be illustrated at what sounds like a reasonable rate. Maybe someone sees an assumed credit rating and thinks, well, the stock market has historically averaged more than that, so this must be conservative.
Josh:But that misses several important details. First, IUL crediting is not the same as stock market returns. Second, dividends are excluded from the index crediting calculation. Third, caps and participation rates limit upside. Fourth, charges are deducted from the policy.
Josh:Fifth, the assumed rate may be the maximum illustrated rate allowed under regulation, not a conservative estimate. That last point's especially important. A rate that looks moderate compared to long term stock market returns may be actually aggressive inside an IUL policy, And early underperformance can be especially damaging. Think back to the bucket analogy. In the early years, the bucket may not have much water in it yet.
Josh:If you experience zero crediting years early while charges are coming out, the policy can fall behind quickly. And once it falls behind, it can be difficult to catch up. This is similar to sequence of returns risk and retirement planning. The order of returns matters. Two policies with the same long term average credit rating can have different outcomes depending on when the good and bad years occur.
Josh:And once loans begin, the margin of for error becomes even smaller. This is why it's wise to ask for multiple illustrations, not just the most attractive one. Ask for lower crediting rates. Ask for zero crediting years. Ask for delayed and reduced income scenarios.
Josh:Ask what happens if caps are lowered, ask what happens if charges increase. A good planning conversation should not only show what happens if things go well, it should show what happens if things go differently than expected. One of the biggest selling points of IUL is tax free retirement income. That phrase deserves careful attention. It is true that properly structured life insurance can allow access to cash value through withdrawals up to basis and policy loans.
Josh:It is also true that death benefits are generally income tax free, but that does not mean the strategy is risk free. Policy loans are not free money. They are loans against the policy. Depending on the contract, the loan may have a fixed or variable interest rate. The borrowed portion may or may not continue participating in the index crediting.
Josh:The loan can reduce cash value. It can reduce the death benefit. And if too much is borrowed, the policy can become unstable. Here's where the tax risk becomes serious. If a policy with loans lapses, the gain in the policy may become taxable as ordinary income in the year of lapse.
Josh:That can include amounts previously accessed through loans. In plain English, you could spend years taking what you believed was tax free income, only to later face a large tax bill if the policy collapses. That is a very different outcome than the sales presentation many people remember. Another issue is that income from a life insurance policy is not like income from an annuity. It is usually not automatic.
Josh:The policy owner often needs to request in force illustrations, evaluate whether the distributions are still sustainable, decide whether to take loans or withdrawals, complete forms, and continue monitoring the policy. That can be a lot to manage, especially later in retirement. And remember, the original illustration may have shown income from a certain age to another age, but that does not mean the carrier is guaranteeing that income. So when you hear tax free retirement income, I want you to mentally replace that phrase with something more accurate, potential tax advantaged access to policy cash value if the policy is properly structured, properly funded, properly managed, and does not lapse. That is not as catchy, but it is much closer to reality.
Josh:One of the most overlooked risks in IUL planning is carrier behavior. Many people assume the main question is, what will the market do? That matters, of course, but with IUL, the insurance company's decisions may matter just as much and sometimes more. The carrier determines many of the policy's moving parts. It sets caps.
Josh:It sets participation rates. It determines spreads. It controls certain charges within contractual limits. It decides how existing policy owners are treated compared to the new buyers, and this creates potential conflict. A carrier may offer attractive terms to new policyholders in order to drive new sales, but over time, in force policyholders may receive less attractive terms.
Josh:That does not necessarily mean anything improper has happened. The carrier may be operating within the policy contract. But from the policy owner's perspective, the impact can be very real. Lower caps can reduce future crediting. Higher charges can reduce cash value.
Josh:Less favorable loan provisions can make retirement income less sustainable. This is one reason an IUL decision should not be based only on the highest illustrated values. The highest illustration is never the best policy. In fact, a policy with a slightly less flashy illustration from a carrier with stronger in force behavior, better guarantees, and more consumer friendly provisions may be more attractive than a policy showing higher projected values that depend heavily on non guaranteed assumptions. The challenge is that most consumers do not know how to evaluate those factors.
Josh:They see the projected cash value. They see the projected income. They see the carrier logo, and they assume the comparison is straightforward. It's not. This is where working with a fiduciary planner and a qualified insurance specialist can be valuable.
Josh:The goal is not to chase the best looking projection. The goal is to understand the risks, the guarantees, the moving parts, and how the policy fits into your actual financial plan. So what should you do if someone has proposed an IUL to you as a retirement strategy? First, start with your financial plan. Do you actually need more life insurance?
Josh:How much death benefit do you need? How long does that need last? Are you already on track for retirement using simpler, more transparent tools? Have you fully used retirement accounts, taxable investment accounts, Roth strategies, comparable planning, or other options that may be more flexible? Do not start with the product.
Josh:Start with the goal. Second, acknowledge the appeal. There are reasons people are attracted to IUL. Tax deferral is appealing. Tax advantage access is appealing.
Josh:Downside protection sounds appealing. A death benefit can be valuable, but a good decision requires comparing the benefits against the trade offs. Third, request conservative illustrations. Do not rely on one illustration at the maximum allowable rate. Ask for lower crediting rates.
Josh:Ask for zero crediting years. Ask for reduced caps. Ask for what happens if distributions begin later or earlier. Ask what happens if you stop premiums. Fourth, review the actual policy mechanics.
Josh:What are the guaranteed charges? What are the current charges? What is the maximum cap? Can participation rates change? Can spreads change?
Josh:Are bonuses or multipliers guaranteed? What are the surrender charges, and how long do they stick around? How does the loan provision work? What happens if the policy lapses? Fifth, understand the modified endowment contract rules.
Josh:A policy that becomes a modified endowment contract loses some of the tax advantages people are usually seeking. You do not need to become an expert in the tax code, but you should understand that premium funding must be carefully designed and monitored. Sixth, compare alternatives. More times than not, the better solution is term insurance for the death benefit need in a separate investment portfolio for accumulation. Sometimes permanent insurance is appropriate, but it should be protection focused with strong guarantees.
Josh:Most times, no additional life insurance is needed at all. The point is not that IUL can never fit. The point is that it should have to earn its place in the plan. And when the only tool an insurance salesperson has is a hammer, all problems look like a nail. Now what if you already own one of these policies?
Josh:First, do not panic. Second, do not make a quick decision based only on frustration. Permanent life insurance policies can be complicated, and surrendering a policy without analysis can create unintended consequences. Start by gathering the documents. Get the original sales illustration.
Josh:Get the policy contract. Get the recent annual statements. Get any marketing material you were given, get the correspondence that explain why the policy was purchased, then request an in force illustration. An in force illustration shows how the existing policy is projected to perform from here based on current values and assumptions. Be specific when requesting it.
Josh:You may wanna see scenarios with no future premiums, continued premiums, reduced death benefit, lower crediting rates, no future distributions, or revised distribution amounts. If the policy is underperforming, there may be several possible paths. One option is to keep the policy but adjust expectations. Maybe it no longer works as a retirement income tool, but it still provides a valuable death benefit protection. Another option is to reduce the death benefit if allowed to lower the cost of insurance and improve sustainability.
Josh:Another option is to stop future distributions or delay them. Another option may be surrendering the policy, but you need to understand the tax consequences and how much the insurance company will keep first. Always confirm your cost basis and surrender value in writing before surrendering. In some cases, a ten thirty five exchange may make sense. This allows certain insurance or annuity contracts to be exchanged without triggering immediate taxation.
Josh:That can sometimes preserve basis and create a better outcome than simply surrendering. For older insured individuals or those with serious health issues, a life settlement may also be worth exploring. That means selling the policy to a third party for more than the surrender value, though this comes with its own complexities and should be reviewed carefully. And if you believe the policy was misrepresented to you, especially if you were told the income was guaranteed tax free no matter what, or that the product was something other than life insurance, it may be appropriate to consult legal counsel. Let's bring this all together.
Josh:Indexed universal life can sound simple in a sales presentation, but it's not simple in real life. The first key point is that IUL's life insurance. It should not be evaluated only as an investment or retirement income tool. Start with whether there is a real death benefit need. The second key point is that the illustration is not a guarantee.
Josh:Long term projections can depend on aggressive assumptions, steady positive crediting, and non guaranteed policy features. The third key point is that a 0% floor does not mean you cannot lose money. Charges still come out, and cash value can decline. The fourth key point is that carrier behavior matters. Caps, participation rates, spreads, expenses, and loan provisions can all impact long term performance.
Josh:The fifth key point is that policy loans require careful management. Tax free income is only tax free if the policy stays in force and is managed properly. As fiduciary planners, our job is not to sell you on a product. Our job is to help you make informed decisions that support your long term financial independence, your family, and your values. Sometimes life insurance is an important part of that plan.
Josh:Sometimes it's not. And when it is, the design should match the need. If your primary goal is protection, focus on reliable protection. If your primary goal is retirement income, compare all available strategies clearly, honestly, and with realistic assumptions. The right financial plan should not depend on a best case sales solution.
Josh:It should be built to hold up in the real world. If you found this episode helpful, please consider subscribing to the podcast and leaving a review. It helps more people find the show and continue learning how to make smarter financial decisions. I'm Josh Duncan, partnered F5 Financial Planning. If you would like to learn more about how we help our clients achieve freedom for personal significance, please visit our website at www.f5fp.com.
Josh:Thanks for listening, and I'll see you in the next episode.