What is a Max Funded IUL?
- acox11
- 2 hours ago
- 7 min read
*** Other Topics of Interest***
Comparing IUL vs Roth IRA
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What is Max-Funded IUL?
What is a max-funded IUL? A max-funded Indexed Universal Life Insurance (IUL) is a type of permanent life insurance policy that builds cash value by crediting interest based on a market index allocation like the S&P 500.
A max-funded IUL is designed to maximize the cash value accumulation by minimizing the amount of life insurance purchased with the policy. In essence, maximizing the premium payments into the cash value account of an IUL policy to accelerate the effect of compound interest on the account value growth while minimizing the cost of insurance.
A max funded IUL can potentially provide tax-free income in retirement and death benefit protection for loved ones. It is important to note that a max funded IUL is not suitable for everyone, as the returns are based on the performance of the stock market index, which can be unpredictable. However, an IUL guarantees protection against market loss in down years.
How a Max-Funded IUL works
Max-funded indexed universal life insurance is simply maximizing the premium payments to grow the accounts cash value over consideration of the death benefit. The net death benefit will increase slowly over time.
What's the leading alternative to a max-funded IUL?... A level option IUL.
So what is a level-option IUL?
A level option IUL has a level net death benefit throughout the life of the policy. Usually for at least the first 20–25 years, the net death benefit is the same as the initial death benefit.
This policy design gives you more life insurance protection from day one.
What are the Benefits of Max Funded IUL's?
1. Tax-free withdrawals: The cash value in a Max-Funded IUL grows tax-deferred and can be accessed tax-free through withdrawals or policy loans.
2. Potential for higher cash returns, Max-funded IULs have the potential to earn higher overall returns over time compared to traditional whole life insurance policies, because they are tied to a stock market index. This allows you to benefit from market gains while also having downside protection to avoid losses during market downturns.
3. Potential Income for life: A Max-Funded IUL can provide a steady stream of income during retirement, which can help supplement other sources of retirement income.
4. Protection against market volatility: IUL’s have a minimum floor guarantee of usually at least 0% (Zero is your hero). Whenever the indexes decrease in value, the IUL growth plateaus, not gaining, but more importantly, not losing. This can be especially beneficial for risk-averse individuals who want to participate in market gains without the risk of losing their principal.
5. Estate planning benefits: The death benefit of an IUL can be paid out tax-free to beneficiaries, bypassing probate.
6. Access to cash value: One of the main benefits of a max-funded IUL is that policyholders have access to the cash value through policy loans and withdrawals. This can provide a source of liquidity in times of need, even before legal retirement age.
7. Death benefit: In addition to the cash value component, a max-funded IUL also provides a death benefit to beneficiaries. This can provide financial security to your loved ones in the event of your passing prematurely.
8. Flexibility: Max-funded IULs offer flexibility in terms of premium payments, death benefit options, and crediting allocation strategies. Policyholders can adjust their premiums and coverage amounts based on their changing financial needs.
9. Wealth transfer: A max-funded IUL can be used as a wealth transfer tool to pass on assets to future generations. The death benefit is typically paid out income tax-free to beneficiaries, providing a tax-efficient way to transfer assets to heirs.
BONUS
A key feature of IUL policies is their protection against market losses with a 0% floor guarantee. In the chart below, see how $500,000 cash value in an IUL would have performed against $500,000 invested in a qualified retirement plan (i.e. 401k, IRA) invested directly in the market from 2007 to 2012.
A Case-Study on Max-funded IUL's
Let's look at a case study. My sample client is 25 years old and desires to open an IUL policy at $300 monthly premium.
I will show you two scenarios. In the first scenario, I design a max-funded IUL policy with increasing death benefit (option B), that minimizes the amount of insurance purchased. The second policy design uses a level policy design (option A).
With the max-funded IUL policy, my sample client receives an initial face amount of $100,481 in return for $300 per month. This is the initial value of the policy. Each year, the face amount increases, raising the net death benefit amount every 12 months on the illustration.
The policyholder cannot borrow against the face amount or net death benefit. The “initial face amount” is the “death benefit” of the policy on day one. As the policyholder ages gracefully, the death benefit rises as the number of years pass. In an increasing option, max-funded policy, the net death benefit = the initial face amount + the account value - outstanding loans/fees.
In this example below, if the policy owner contributes to their IUL for 40 years, through age 65, with an average rate of return of 6.03%, they have accumulated $575,434 in cash value.
They could take all this money out at once, but most people would not have any practical purpose for doing that. So most people will slowly “borrow” against their cash value and use it to supplement their retirement income.
Assuming the policy owner lives 25 years and dies at the age of 90, they could take a yearly loan, or annual salary, of $52,764. So, from a lifetime contribution of $144,000, they created a potential retirement income of over $1.3 million tax-free … nearly 10 times their total contribution.
What if we Max Fund a Level-Option IUL Policy?
Now what if this client instead chooses to max fund a level-option IUL for $300 per month, even though everything else about their profile remains the same? The policy now offers more life insurance coverage with an initial face amount of $317,372.
You will have three times as much coverage and protection against premature death starting from day one. It would take 23 years for the max-funded policy to offer at least the same amount of life insurance protection.
Now, picture this client as married and expecting a baby. Suddenly, the day one life insurance amount seems much more appealing than the previous policy. But here is the real kicker! After 40 years, just like the other design, this client can start taking an annual salary of $53,746!
How did this happen?! That's more than the client receives from the basic max-funded policy! Isn’t that the point of a max-funded policy? How could this be? They are not paying higher premiums.
Well, circling back to the small detail I mentioned earlier — many insurance companies will reward clients with higher market index caps when they purchase more insurance. So, in this case it results in the max-funded policy receiving 6.03% interest with an 11.5% cap but the max-funded level option IUL received 6.35% interest with a 12% cap.
Over 20–40 years, that half percent difference in the cap can make a difference. And when I design a max-funded IUL for my clients I mix it with the level death benefit IUL to get the best of both worlds!
Even if a pure max-funded policy gives the client a higher annual salary, it might not be significantly higher to overlook all the insurance protection the client can receive. Sometimes the difference is 3x, 5x, or almost 10x more life insurance protection. So max funded IUL’s are not a one-size fits all box.
If the salary is only $5000 more per year ($5000 / 12 months = $417), often the policy owner would prefer to have the insurance rather than the extra $400–$500/month in salary.
Every person is unique, so every situation is different. It's important to analyze the numbers and determine what is best for the policyholder. Most of the time, my clients choose the level option policy over the max-funded policy because it offers more benefits beyond the cash value growth.
The Living Benefits of Life Insurance
Something else to consider: Insurance policy holders can use the death benefit while they are alive if they become seriously ill. This benefit is known as a "living benefit" and is provided by many insurance companies.
Having a higher death benefit means you have more financial protection. This can be used for nursing home expenses or medical bills not covered by medical insurance. Clients could even use the money to take that dream trip on an African safari if they wanted.
But the key takeaways are that you would be making a mistake to assume a purely designed max-funded policy will grow the cash value higher 100% of the time more than combining it max funding with a level-option policy. I’ve already proven that to be false in the video above. But even if the max-funded policy does have a higher annual salary, it may not be that much more to dismiss the extra insurance protection.
You may talk to a lot of financial professionals that may not even think about this at first. But the bottom line is often insurance companies will give higher interest rate caps for purchasing more life insurance and this can be better for clients' cash value component in the short- and long-term financial run.
We would love the opportunity to work with you on your IUL design.
Call 844.711.1130
Other Topics of Interest
Comparing IUL vs Roth IRA
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