Financial Literacy Group Releases a white paper study that shows an Index Universal Insurance policy is superior as a retirement instrument when compared to a 401K or IRA, especially after the CARES Act 2020. But even more game changing when used as a Hybrid Arbitrage Bank, when compared by purpose, investment limit, tax advantages, longevity, Investment Options, utilization, wealth accumulation and risk.

SANTA MONICA, Calif., Sept. 19, 2023 /PRNewswire-PRWeb/ -- The CARES Act, passed in 2020, brought several changes to the IRS codes 7702 and 101(a), which impacted the Index Universal Life (IUL) insurance policies, along with other life insurance policies.

Changes to retirement accounts and insurance policies to provide financial relief during the COVID-19 pandemic. However, the effect was indirect, it didn't directly alter the IRS codes 7702 and 101(a).

IRS Code 7702 defines what constitutes a life insurance contract for tax purposes. It sets the minimum death benefit that a policy must have relative to its cash value to qualify as a life insurance contract and receive tax advantages, like tax-free death benefits and deferred cash value growth.

IRS Code 101(a) generally states that death benefits paid by a life insurance policy are not included in the gross income of the recipient, and therefore not subject to income tax.

Index Universal Life (IUL) Insurance is a type of permanent life insurance policy that has a cash value component, which can be invested in index-linked options. IUL policies provide a death benefit and also have a cash value component that grows on a tax deferred basis.

The cash value in an IUL policy can be accessed via policy loans or withdrawals. Policy loans are generally not taxable, as they are considered debts, not distributions. However, if the policy lapses or is surrendered with a loan outstanding, the loan balance becomes taxable.

Here's how these changes affect the three retirement instruments mentioned. 401K and IRA, these are tax-advantaged retirement accounts. You contribute pre-tax dollars, your investments grow tax-free, and then you pay taxes when you withdraw the money in retirement. The CARES Act allowed for increased borrowing limits from 401K plans and waived the 10% early withdrawal penalty on distributions up to $100,000 for those under 59 1/2. It also allowed for the deferment of Required Minimum Distributions (RMDs) for 2020.

An Index Universal Life Insurance policy is a type of permanent life insurance that also offers a cash value component that can grow over time. The cash value can be invested in index options (e.g., S&P 500) and grows tax-deferred. You can take loans against the cash value, which are not taxable. The changes to the IRS codes 7702 and 101(a) impacted the minimum interest rates used for calculating the premiums and cash values of these policies, which could potentially allow for higher cash value accumulation.

The Cares Act Allows an IUL to Duplicate a Bank when the IUL is created for Hybrid Arbitrage it becomes similar to a Bank Owned Life Insurance (BOLI). In this scenario the owner can borrow against the money used to overfund the IUL policy (i.e., the cash value), they are not borrowing against the death benefit. This BOLI style IUL is liquid, without surrender charges, or caps, the owner's liabilities can be used to overfund the policy.

Here are four potential benefits when using a Hybrid Arbitrage IUL as compared to a 401K or IRA:

• Purpose:
• IUL: Provides a death benefit, the funds from an IUL policy can be used for any purpose including debt elimination and the opportunity for cash value accumulation. The benefits of using debt to reduce the pay-off time and interest, also known as "debt elimination," involve using the cash value of an IUL policy to pay down debt while continuing to earn interest on the borrowed amount. This strategy aims to optimize cash flow, minimize interest paid, and increase wealth accumulation because the tax-free loans never have to be paid back.
• 401(k) and IRA: Primarily designed for retirement savings, whereas there might be penalties for early withdrawals or non-qualified expenses from a 401K or IRA
• Investment Limit:
• IUL: There is no legal limit on the amount you can invest in an IUL policy. No legal limit on the premium, but it must be within the boundaries set by IRS Code 7702.
• 401(k) and IRA: There are annual contribution limits for 401K and IRA accounts.
• Tax Advantages:
• IUL: The cash value grows deferred, and loans are generally not taxable. The tax status doesn't change unless the policy lapses or is surrendered with an outstanding loan.
• 401(k) and IRA: Contributions are tax-deductible, and investments grow tax-deferred, but withdrawals in retirement are subject to income tax.
• Longevity:
• IUL: Is a permanent life insurance policy, it lasts your entire lifetime, as long as premiums are paid.
• 401(k) and IRA: Accounts do not offer any life insurance component and can be depleted if withdrawals exceed the growth of the investments.

Using a 401(k), IRA, or Index Universal Life (IUL) policy for retirement involves different strategies, risks, and benefits.

401(k):

• Definition: Employer-sponsored retirement plan that allows employees to contribute a portion of their earnings before taxes. Employers may match contributions up to a certain percentage.
• Taxation: Contributions are tax-deductible, and the investments grow tax-deferred. Taxes are paid upon withdrawal in retirement.
• Investment Options: Limited to the options provided by the employer's plan, which usually includes a range of mutual funds, stocks, bonds, etc.
• Wealth Accumulation: Depends on the market performance of the investments chosen.
• Risks: Subject to market risk. The value of your 401(k) can go down if the market performs poorly.

IRA (Individual Retirement Account):

• Definition: Retirement account that allows individuals to contribute pre-tax (Traditional IRA) or after-tax (Roth IRA) money.
• Taxation: Traditional IRAs allow for tax-deductible contributions and taxes are paid upon withdrawal. Roth IRAs are funded with after-tax dollars but withdrawals in retirement are tax-free.
• Investment Options: Broader than a 401(k). Can include stocks, bonds, mutual funds, ETFs, etc.
• Wealth Accumulation: Depends on the market performance of the investments chosen.
• Risks: Subject to market risk. The value of your IRA can go down if the market performs poorly.

Hybrid Arbitrage Index Universal Life (IUL) Insurance:

• Definition: A type of permanent life insurance that provides a death benefit and a cash value component that can be invested.
• Taxation: Premiums are paid with after-tax dollars. The cash value grows deferred, but loans from the cash value are tax-free.
• Investment Options: The cash value can be invested in index accounts that are linked to a stock market index, usually the S&P 500.
• Wealth Accumulation: The cash value has the potential to grow based on the performance of the index, but it also has a guaranteed minimum interest rate (e.g., 0% floor) which means the cash value won't decrease even if the index performs poorly.
• Utilization: Because this policy has no surrender charges the cash value can be borrowed at any time without tax and used to pay debt early or cancel interest.
• Risks: Lower risk compared to 401(k) and IRAs because of the guaranteed minimum interest rate. Because there are no caps on the return you can earn maximum rates or returns..

401K, IRA and IUL Comparison:

• Risk: The IUL has the least risk among the three due to the guaranteed minimum interest rate (floor). 401(k) and IRAs carry market risk, which means they can lose value if the market performs poorly.
• Taxation: 401(k) and Traditional IRA allow for tax-deductible contributions, while IUL and Roth IRA do not. However, IUL and Roth IRA allow for tax-free withdrawals up to a certain amount, while 401(k) and Traditional IRA do not.
• Money in a 401K or an IRA cannot be accessed early without penalties. With liquid IUL the cash value can be accessed and used to pay debt early, canceling interest.
• Investment Options: IRAs offer the most investment options, followed by 401(k)s. IULs have limited investment options, usually linked to a stock market index.
• Wealth Accumulation: While the IUL offers a guaranteed minimum interest rate, it also usually has a cap on the maximum return, but in the case of Hybrid Arbitrage there are no caps on the IUL, which means there is no limit to wealth accumulation in years when the stock market performs exceptionally well. 401(k)s and IRAs do not have a cap on returns, but also do not have a guaranteed minimum interest rate.

The differences between these options are not widely known or understood by most consumers because financial products can be complex and challenging to understand without a thorough explanation from a knowledgeable source. Additionally, most life insurance or financial advisors may not educate clients on these options because they may not be well-versed in the intricacies of life insurance products, or they may have a bias towards products that they commonly sell or that provide them with higher commissions.

It is crucial to work with a financial advisor who understands your financial situation, goals, and is knowledgeable about a wide range of financial products to get the most appropriate advice for your situation.

Financial Literacy Group is changing the narrative on financial wellness, our solutions equalize the financial playing field between middle class Americans and financial institutions. We teach adults who live on Main Street how to manage their finances like people who work on Wall Street, one individual, one family or one small business owner at a time. Download the Bank Like a Bank App on the App Store or Google Play.

Media Contact

Ronald Harris, Financial Literacy Group, 1 3234191600 1005, ron@financialliteracy.group, https://financialliteracy.group/

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SOURCE Financial Literacy Group