What's Not So Great About Traditional Retirement Accounts (TRA's)

I'm going to assume you know the pros already, but here are two major cons regarding TRA's that are glaring. The first negative is the dreaded word, taxes.

Did you know that with TRA's when you begin to withdraw against the principal in retirement, that you will be paying taxes on the amount you withdraw each year?

Most people think they won't have to pay taxes, but it is not always the case. You got the opportunity to defer the taxes, but now in retirement you still have to pay them each year, which eats into the net amount you will receive.

The only exception to this rule is if you have a "qualified" Roth retirement account, but as you will see below, it will still not provide as many benefits as an IUL does for you.

The second negative is you are also exposed to market downturns and crashes.

If you end up retiring and drawing upon your built up nest egg, the total amount you can withdraw will be lower because the total value of your account(s) will be less than it was before the drop in the market.

The Pros & Cons Of Indexed Universal Life Insurance (IUL)

We are going to be fair to TRA's, as I will provide you with both pros and cons of IUL's. I'll make this quick, so let's first start with the benefits.

1. Protects your family and can protect your income as well.

An IUL is life insurance (like term life), which automatically protects your family in case of your early death with a net death benefit. Unlike term life which can expire after the initial term period, an IUL runs for your entire lifetime as long as the premiums are paid up through age 65.

IUL's can also be structured with riders to protect your income in case of disability or critical illness during your working years. So if loss of income occurs for those reasons, you will be allowed to take a portion of your net death benefit to help with whatever needs are required for you and your family.

2. Protects you from market risk

An IUL provides you with an opportunity to tie your cash value to a market index like the S&P 500, so your money can experience gains from the stock market. However, the main benefit is you will not experience any market losses - even when the market crashes. More on this later.

3. Protects you from paying unnecessary taxes

Because an IUL is a life insurance product, the IRS classifies the money paid in as premiums and the growth that occurs to that cash value over time as tax-advantaged.

When you decide to pull out money in retirement, you would be taking that money in the form of a policy loan (which does not have to be re-paid), therefore making every withdraw you make each year tax-advantaged retirement income (meaning taxes are not due on those funds).

When you eventually pass away, any outstanding loans would be subtracted from the net death benefit before being disbursed to your beneficiaries on a tax-advantaged basis as well.

The main cons of IUL's are as follows:

1. There are no dividends paid out as with whole life policies.

2. A portion of the money you put in has to pay for the death benefit portion of your life insurance policy, so not all of your money goes towards cash value accumulation and growth.

3. And lastly, you only get to participate in a capped portion of the market growth each year.

For example, different insurance carriers have different cap rates, but some go as high as 12%. This means if the market goes up 20% for the year, you will only receive 12% gains of the growth for that year.

But on the other side, if the market goes down 15%, you will not experience any losses. So overall, it all equals out and your money is protected if you decide to retire during a market downturn or crash.

So now let's do a full comparison, running the numbers between Traditional Retirement Accounts vs an IUL. Here is an image with all of the math and information completed.