While I call it a “Super Roth,” this isn’t a retirement account…
Instead, it’s a strategic way of using a life insurance policy for tax-free earnings on investments as well as a way to make tax-free withdrawals.
Now, you can’t do this with just any life insurance policy. There are many different kinds of life insurance policies, and they aren’t all created equal.
Indexed universal life (IUL) insurance policies allow you to allocate cash value amounts to either a fixed account or an equity index account tied to the S&P 500, the Nasdaq 100 or something similar.
IUL policies also offer tax-deferred cash accumulation for retirement while maintaining a death benefit.
But they are considered an advanced life insurance product because most insurance agents have a difficult time explaining them.
And that’s too bad — because IUL policies offer some amazing benefits.
What Makes IUL Policies Awesome
The first feature, of course, is the death benefit — money you can leave behind to ensure your family can live the lifestyle they are accustomed to.
The death benefit is paid directly to that beneficiary within days of the death of the insured. It does not get tied up in probate or other legal battles. It is quick, simple, easy and immediate.
The second key feature is the cash accumulation IULs provide. This cash can be accessed and used at your discretion.
In fact, you can withdraw up to the total amount of premiums you’ve paid into the policy completely tax-free. (Of course, taking money out of the account will limit its growth. It all comes back to triple compounding.)
Also remember that an IUL’s growth is tied to an index like the S&P 500, Nasdaq 100 or something similar. If they increase in value, so will the cash value of your account.
But be aware the growth is usually capped. If the index reaches a certain point, your account will stop growing for that year. Each insurance company sets its own ceiling on growth, so be sure to ask when it kicks in.
On the other hand, you never have to worry about market losses…
A “Super Roth” Is Practically Bulletproof
Your account’s cash value will never fall below its initial value because of what’s happening on Wall Street.
Even better, IUL policies have something called an annual reset provision, which effectively increases your account’s loss protection each year, assuming it made money that year.
Let’s say you have $10,000 of cash value in your IUL policy. That cash value is guaranteed not to fall. A year goes by and your account is now worth $10,500.
On your account’s anniversary, you can use the annual reset provision to lock in the account’s current cash value. And if it’s worth even more next year, you can lock in that new higher value.
So an IUL protects against loss and protects your annual growth as well!
The money you accumulate may also be protected from creditors. While laws vary from state to state, in general, money inside a life insurance policy cannot be taken from you due to bankruptcy, lawsuit or another type of judgment.
An IUL also protects you from taxes — at least for a little while. Any growth in your life insurance’s cash value is tax-deferred. If you withdraw your funds or cancel the policy, any amount in excess of the premiums you’ve paid will be considered (and taxed as) income.
However, there is a way for you to gain access to an equivalent of the cash value amount completely tax-free.
It’s the strategy that effectively makes an IUL policy a “Super Roth.”
Accessing Your Accumulated Cash Tax-Free
To get tax-free access to your IUL policy’s cash value, you use what is called the policy loan provision. Essentially, the life insurance company allows you to take out a loan using the cash value of your policy as collateral.
Let me be perfectly clear — you are not withdrawing any money from your account. Technically, you are not borrowing from your account, either.
Instead, the insurance company is lending you a sum of money based on the cash value of your policy. And since the money you receive is a loan, it’s not considered income. Therefore, it’s not taxed.
OK, but now you’re stuck with a loan. Obviously, it needs to be paid back… with interest.
However, you don’t have to pay the interest. Instead, the insurance company takes money from your cash value account and puts it into a separate account that earns an amount equal to your loan interest.
Let’s say your IUL has a cash value of $50,000, and you decide to borrow $10,000 against that cash value. While rates can vary, let’s say your insurance company charges 4% interest on the loan.
But your insurance company then takes $10,000 — equal to your loan amount — out of your policy’s cash value and puts it into a separate account that earns 4% a year.
If you’re being charged 4% on the loan but also earning 4% on the cash value that’s acting as collateral for your loan, what is the net loan interest rate?
The answer is “zero” — it’s a wash!
In fact, this is often referred to as a “wash loan provision,” or a “wash loan.” It can also be called a fixed loan option.
If you decide to explore this strategy, be sure you are getting a fixed loan or a wash loan. (There is another type of loan called a variable loan. But it does NOT operate the same way a wash loan does.)
And don’t forget, taking out a loan against the cash value of your IUL policy will reduce the money in your account. It could potentially reduce the death benefit as well.
But it also gives you one last way to keep Uncle Sam’s hands off your cash…
The Ultimate Tool for Avoiding the IRS
Death benefit proceeds are income-tax free. In other words, your loved ones won’t have to declare their last gift from you on their income tax forms.
If you still have an outstanding loan against the cash value of your account when you pass on, it will be paid off with the income-tax-free death benefit. Once that loan is paid off, what’s left over gets paid out to your beneficiary, also income-tax free.
And taking out a loan on an IUL policy is the perfect way to tell the IRS to go jump in a lake.
The IRS pretends it’s doing you a favor by letting you invest in tax-deferred IRAs and 401(k)s and tax-free Roth IRAs. But they absolutely shackle you with restrictions.
The “Super Roth” strategy avoids all of them.
You can contribute to a life insurance policy no matter how much money you make… You’re not locked out if your income is too high, which is what prevents many people from standard Roth IRAs… And there are no limits — put in however much money you want.
As soon as you’ve had the policy out long enough to trigger its wash loan provision, you can borrow tax-free money against its cash value. No need to wait until you turn 59½ to start enjoying the cash!
On the other hand, you don’t need to take money out of your account, either. There are no required minimum distributions, so you can let your money keep growing past the time you turn 70½.
Finally, all the money that comes from an IRA, 401(k) or similar accounts during retirement is considered income. And that can negatively impact how your Social Security benefit is taxed.
But income coming out of a cash-value life insurance policy, whether via withdrawal or loan, does not subject your Social Security payouts to income taxation!
And depending on what state you live in, your life insurance policy may also be protected from creditors and bankruptcy.
The bottom line is purchasing a “Super Roth” is a great way to get the life insurance protection you need and potentially some amazing tax advantages.
Here’s to your better way…
Editor, Strategic Retirement
P.S. Over the past two decades, Beau Henderson’s easy-to-use strategies have helped thousands of families with their retirement goals. Now, Beau is offering our readers access to a book with all his strategies — plus a year of continuing guidance. Go here for details.