NerdWallet: An IUL for retirement? The pros and cons of indexed universal life insurance compared to a 401(k).

by | Nov 8, 2023 | Stock Market

This article is reprinted by permission from NerdWallet. For many, the 401(k) plan is the default standard for retirement planning. According to the Bureau of Labor Statistics, 52% of private sector employees with access to an employer-sponsored retirement plan chose to participate in 2022. But lately, creators on social media are pushing something else entirely: indexed universal life insurance, or IUL.

“A lot of people are thinking about creative ways to save for retirement,” says Mindy Yu, a certified investment management analyst and director of investing at Betterment, based in New York. “This came up as a solution because, hey, you’re actually invested in the market and this … also provides life insurance coverage.” But before cashing out your 401(k) for a life insurance policy, take a step back to read the fine print. When it comes to IUL versus a 401(k) plan, which one wins out? Plus: You can save up to $23,000 in your 401(k) next year, IRS saysWhat’s so special about the IUL? An indexed universal life insurance policy is a type of permanent life insurance. This means that in addition to the death benefit, the policy also has a cash value component, funded through premiums paid, that can be accessed during your lifetime and grows tax-deferred. How an IUL’s cash value grows makes it distinct: you pick which stock and bond indexes that you want it to mirror, such as the S&P 500
then your insurance company pays interest based on that index’s performance. With the historical average stock market return around 10% annually, some social media creators say that’s why the cash value’s growth over time could be enough for retirement. Realistically, however, market volatility means the return won’t always be 10%. Some years, it could be more, others less. And with an IUL, there’s a lot of fine print over how those market movements affect interest payments and your monthly premium. “Some may have caps in terms of how much you can actually earn relative to the index,” says Yu. “Let’s say …

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