With the five-year-old bull market starting to show its age, many advisors are looking for ways to safeguard their clients’ portfolios.

Some believe Indexed Universal Life (IUL) insurance policies, which are linked to a market index but promise not to lose any money if the market goes down, might be the way to protect portfolios while offering tax-free income for retirement.

“The markets are at [near] all-time highs. The question isn’t if the markets will go down, but when and how much,” says Robert Fink, chief executive of RAF Strategies in San Diego. “It’s a place to put money that you know will be there when you need it. You earn a reasonable rate of return without any downside risk. That’s pretty hard to achieve in these economic times.”


Garrett Smith, a financial advisor at Wells Fargo Advisors in Tucson, like many advisors interviewed, says IUL policies should be viewed as life insurance, not an investment vehicle. Nevertheless, he says IUL “is good for folks who don't want the risk of losing their investment, but also need a death benefit and potential access to the cash value of the policy.”

Smith says IUL may be appropriate for clients who are required to take a minimum distribution from their IRA but don't need the money for everyday spending. Instead of that money sitting in an investment account or savings account, he says, they could put it toward an IUL that will provide a death benefit to future generations or a trust.


David Rae, vice president of client services at Trilogy Financial Services in Torrance, Calif., says IUL has advantages for people who are in high tax brackets and have maxed out contributions to their retirement accounts but still want or need to save more or want tax-free income when they stop working.

“With no contribution limits, IUL [is appropriate] for business owners or other people looking to play catch up,” he says. “This can be a great place to save for people who want to retire early, perhaps even to just bridge the gap between retirement and being eligible for Social Security or to avoid the pre- 59 ½ IRS tax penalties [on early IRA withdrawals].”

“This also can be a great place for people who are bit afraid of another 2008-type drop in the market,” he adds. “They have the potential to earn similar if not better returns than a moderate or conservative portfolio with potentially less risk because of the guarantees associated with indexed investing.”


Paul Robertson of Financial Design Group in Phoenix says IUL products are an “interesting option” for financial planning, not just for retirement but for any financial goal.

Specifically, he says, it offers those who are in the top income-tax brackets a way of investing money without taxable consequences. Clients can take income from the policy by borrowing against its cash value. As long as the policy remains alive this does not create a taxable event, he says. Further, he notes, these policies have very low borrowing rates plus credits that offset the finance charges.

While noting that the cost of the indexing strategies inside different IUL policies varies, “if you compare the ongoing internal rate of return, especially considering that those returns come out tax free, they can be quite attractive compared to a moderate stock portfolio and amazing next to rates on CDs,” he says.


Of course, as many advisors say, there is no free lunch, and IUL insurance does have its drawbacks.

“The downside to using life insurance as an investment is the lack of liquidity,” notes Robert Cucchiaro, principal at Summit Wealth & Retirement Partners in Walnut Creek, Calif. “This strategy doesn't work for someone who can’t commit to funding for at least 10 years or for someone who might need to take some of the money out prior to about year 12.”

However, he adds, “the upside is that life insurance is one of the most tax favorable investments you can ever make, if structured properly.”

Typical fees for IUL policies run about 1.5%-2% per year in total fees, financial planners say, with much of that payable in the early years.

“That's not bad considering what the typical mutual fund costs and considering that you are receiving a death benefit, which is not the case with any other investment,” Cucchiaro says.

George Yacik is a Connecticut-based financial writer who writes frequently about investing and consumer finance. He can be reached at gyacik@yahoo.com.