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Tax-Free Retirement Vehicles
At Merity Group we focus on retirement planning through a product called IUL’s. IUL stands for Indexed Universal Life Insurance. It's a type of life insurance that has a savings component attached to it. So not only does it provide protection for your loved ones if something were to happen to you, but it also allows you to save money for your future.
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When you buy an IUL policy, you pay a premium every month or year. Part of that premium goes towards the cost of the life insurance, and the other part goes into a savings account. The savings account is invested in a stock market index, like the S&P 500.
Now, you might be wondering what a stock market index is. It's a way to measure the performance of the stock market as a whole. The S&P 500 is an index that tracks the performance of 500 large companies in the United States. When you invest in an IUL policy, your savings account will be linked to the performance of the S&P 500.
Your savings account can earn interest based on the performance of the S&P 500. If the index goes up, your savings account will earn interest. If it goes down, your savings account won't lose money. So you get the benefit of potentially earning more money when the stock market is doing well, but you don't have to worry about losing money if it goes down.
The interest you earn on your savings account is tax-deferred. That means you don't have to pay taxes on it until you withdraw the money. So it can grow even faster over time.
Now, let's talk about retirement planning. As you get older, you'll want to start thinking about how you'll support yourself when you stop working. Social Security might not be enough to cover all your expenses, so it's important to start saving for retirement early.
An IUL policy can be a great way to save for retirement. The money in your savings account can grow tax-deferred over time, and you can withdraw it tax-free when you retire. Plus, if something were to happen to you before you retire, your loved ones would still be protected by the life insurance component of the policy.
IUL’s “Indexed Universal Life Insurance”
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Indexed universal life insurance (IUL) is a type of permanent life insurance that provides a death benefit to your beneficiaries in the event of your passing, while also offering the potential to accumulate cash value over time.
-The death benefit can be used to pay for expenses such as funeral costs, outstanding debts, and ongoing living expenses.
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IUL policies have a 0% floor, which means that the cash value in the policy cannot decrease below 0% even if the index it is linked to has negative performance. This feature provides a level of protection against market downturns, as the policyholder's cash value will not be negatively impacted by a drop in the index.
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IUL policies may offer accelerated death benefits or “Living Benefits”, which allow you to access a portion of the death benefit if you are diagnosed with a qualifying terminal or chronic illness.
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Many people are skeptical when putting money into a retirement account, you have no access to the money until retirement age or a specified age when you will not be penalized for withdrawal. With IULs there is flexibility in how you can borrow your money.
-To access the cash value in your IUL policy is through policy loans. You can borrow money from the policy using the cash value as collateral, and you will need to repay the loan with interest.
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Younger individuals who are just starting to build their financial portfolios may be attracted to IUL policies because they offer the potential for growth and a death benefit to protect their loved ones in the event of an unexpected passing.
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Middle aged and Older clients are attracted to an IUL policy due to the cash value growth and safety and flexibility of their money going into retirement.
Explaining the Importance of compound interest and the time value of money:
Compound interest is a powerful concept that can help you grow your money over time. When you invest money, you earn interest on the principal amount. With compound interest, the interest you earn is reinvested, and then you earn interest on both the principal and the interest. Over time, this can lead to significant growth in your investment portfolio.
Warren Buffet is a well-known advocate for the power of compound interest and the time value of money. He believes that understanding these concepts is crucial for making smart financial decisions.
The time value of money is the idea that money today is worth more than the same amount of money in the future. This is because money today can be invested and grow over time, earning interest or returns. The longer the time horizon, the greater the potential for growth.
Compound interest is a key factor in the time value of money. It refers to the interest earned not only on the initial investment but also on the accumulated interest. This compounding effect can lead to significant growth over time.
For example, let's say you invest $1,000 in a fund that earns a 10% annual return. After the first year, your investment would be worth $1,100. In the second year, you would earn 10% not just on your initial $1,000 investment but also on the $100 in interest earned in the first year. This means that after the second year, your investment would be worth $1,210. Over time, this compounding effect can lead to significant growth in your investment.
The rule of 72 is a simple way to estimate how long it will take for an investment to double in value based on a given rate of return. To use the rule of 72, divide 72 by the rate of return. For example, if an investment earns a 7% annual return, it would take approximately 10.3 years for the investment to double in value (72 ÷ 7 = 10.3).
One specific example of the power of compound interest is the performance of the S&P 500 index over time. According to a study by JP Morgan, from 1970 to 2020, the S&P 500 index had an average annual return of 10.7%. If you had invested $10,000 in the index in 1970 and left it untouched for 50 years, it would have grown to over $1.2 million.
How these products can benefit in the current state of the market:
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First, IUL policies offer the potential for growth of the cash value. This means that the policy's cash value can grow over time without being subject to taxes on the gains. In a volatile market, this can be a valuable benefit, as it allows the cash value to continue growing, even if the market experiences downturns.
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Second, IUL policies offer a level of protection against market downturns, as they typically include a 0% floor on the policy's cash value. This means that even if the index the policy is linked to experiences negative performance, the cash value in the policy cannot decrease below 0%.
In December of 2022 The S&P 500 growth index had fallen about 30.1% that year, with the biggest annual drop since 2008. People with their money in standard 401k’s and Roth’s have experienced significant reductions to their retirement policies that take years of growth and market upturn to make up for. In these IUL’s they offer a security and peace of mind to the everchanging volatility to the market.
