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I am a US lawful permanent resident. I am interested to know whether indexed universal life insurances have any upside from a tax mitigation standpoint compared to a regular investment account. I.e., I don't wish to consider any other aspect of the life insurance other than its ability to invest in indices and reduce taxes. I also don't want to consider inheritance matters (e.g., I also don't want to consider taxes pertaining to inheritance). I am not interested in 'combined multi-generational taxes paid by the whole family': my sole interest is the tax I pay personally.

In other words, I could rephrase the question "Are indexed universal life insurances of any use from a tax mitigation standpoint compared to a regular investment account?" as: if I have x USD to save each year, does putting the money into an indexed universal life insurance make any financial sense when taking the taxes into account?


From what I can see, indexed universal life insurances have 3 issues:

  1. All dividends from the indexed investments go to the insurer.
  2. The indexed investments have a cap on their returns (e.g., 9.5%/year in the brochure for the indexed universal life insurance "Nationwide YourLife Indexed UL Accumulator")
  3. A rather inflexible choice of investment.

However, indexed universal life insurances have 2 upsides:

  1. They allow tax-free loans.
  2. They have a floor rate, i.e. a guaranteed minimum returns on investment (e.g., 0%/year in the brochure for the Nationwide YourLife Indexed UL Accumulator)

Factoring these downsides and upsides, and perhaps others that I might have missed, are indexed universal life insurances of any use from a tax mitigation standpoint compared to a regular investment account, or they always a non-optimal choice?

I'm quite confident that the cap rate combined with the absence of dividends defeats the floor rate on average by a large margin (= a regular investment account yields a higher return on average), but I wonder whether the possibility of tax-free loans make indexed universal life insurances more attractive than a regular investment account.

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    Borrowing your own money (as is common with a 401(k) for example) is always "tax free" as it's your own money. Dec 7 '21 at 10:46
  • @JTP-ApologisetoMonica Thanks, I guess this means that investing into an indexed universal life insurance doesn't make any financial sense when taking the taxes into account, assuming one is only looking at after-tax returns and ignore inheritance matters. You're welcome to convert your comment into an answer. Dec 7 '21 at 10:49
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    I spent a long time, decades ago, analyzing IUL performance. Taking their crediting formula and running S&P data to it. In any 10 year period, the IUL results badly lagged treasury returns. Maybe they changed since, but then, they were a remarkably bad deal. A risk averse investor was better off in CDs and/or T-Bills. It was mid-90s, if I find my work, I'll update or post an answer. Dec 7 '21 at 10:59
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    Clarification - are you interested in 'combined multi-generational taxes paid by the whole family'? Or just the tax you pay personally? Some of the tax advantages of investing heavily into insurance-based products come into play only when you are looking to maximize the value of inheritance, not so much looking to maximize the amount you personally hold while alive. Dec 7 '21 at 14:46
  • @Grade'Eh'Bacon thanks, good point, just the tax I pay personally. Dec 8 '21 at 7:02

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