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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, 2021 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, 2021 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, 2021 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, 2021 at 14:46
  • @Grade'Eh'Bacon thanks, good point, just the tax I pay personally. Dec 8, 2021 at 7:02

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