The appeal of index universal life products is partly due to the fact that they can be illustrated at interest rates that are higher than those currently being credited to fixed interest universal life policies. There is no standardization for the methodologies used to illustrate current cash values, so an IUL illustration often shows favorable numbers.
Floors and caps, choices of indexes, being unsure of the interest rate a product will receive until the end of a certain period, and non-guaranteed elements that can change make index UL products very complex.
A few things to consider when evaluating an IUL illustration: •What interest rate is the illustration using? •Is it conservative or optimistic? •Is it a level interest rate or have they varied it from year to year? •What would the product look like at a lower interest rate? •Is there a loan assumption? If so, what does that do to the cash value of the policy?
Because it is a universal life product, the interest return is only one part of the life insurance calculation puzzle. Non-guaranteed expense and mortality charges may vary in the future based on the experience of the company and the product.
There are many technical parts of your question but to put simply, you can borrow against an insurance policy and policy loans are tax free as they are loans. There are many factors to consider in doing this. Every policy is designed differently. That is the most important thing, having the policy designed right with the correct features. Also, I have always felt the main purpose of life insurance is to protect your family, not as a retirement plan. The most important thing is to work with a good agent that you trust.
An indexed universal life insurance policy gives the policy holder the opportunity to allocate cash value amounts to either a fixed account or an equity index account. Indexed policies offer a variety of popular indexes to choose from, such as the S&P 500 and the Nasdaq 100.
I don't know why someone would sell IUL as a "7702 Plan". I would ask what they mean to better understand. But, feel free to read this article as food for thought. https://blog.wealthfront.com/7702-retirement-plan/
No, unfortunately, you may not withdraw money from this account unless you are closing it and you should be aware of any surrender charges that may apply. You may however take a loan on part of the money keeping in mind that interest rates will apply. Also, Michael told you something very important, "if your policy ever lapses for any reason, all of your distributions become taxable".
There are many options other than IUL and I would recommend exploring those options. But talking with a specialist is a must. And I would add this, always read and understand your policy whenever you buy life insurance.
This is a very complex question, so, I'll try and simplify it the best I can in limited space.
Index Universal Life is merely a Life Insurance product that, instead of using "current market rates", links its return to some index of the markets, most often the S&P 500 Index. The company then credits your account with some percentage of the gain in that index at a preset point in time.
Now, as far as a 7702 plan goes...
IRC 7702 outlines the implications of life insurance contracts, a specific financial product.
It is not a "retirement plan" as some would have you believe. It is merely a section of the Internal Revenue code which defines certain characteristics of Life Insurance.
While life insurance has many good features, it is not, and should not be presented as anything other than what it is.
And, you cannot withdraw your money at 'any time" without penalties, as most contract have huge up front commission, and normally a surrender charge for the first several years.
If you need to save for retirement, first, max out your 401k if you have one... if not, an IRA... only then should you consider this as a savings vehicle.
While life insurance is an important tool in the "Financial Planning" toolbox, it is but that, and should first be purchased to solve a problem in the event of your death.
Proceed with caution... better yet, consult with a local Certified Financial Planner before committing to this... it is a long term proposition... not a "savings account".
Index universal life is a policy that credits based on a financial index. Though you cash value will not go down in a bad year, in good years there are typically caps on how much growth you will be credited.
7702 is the section of the IRS Code that defines cash value life insurance. Period. There is no scheme for Congress to create a 7702 Plan. To be fair, cash value life insurance has favorable tax treatment, and some consider it the last great tax loophole.
Don't be swayed by a salesman trying to package life insurance as a retirement plan. If you want like insurance, you should buy life insurance. If you want to invest in a retirement plan, you should take advantage of a 401(k) if available. If not, you should start an IRA. Consult a local financial professional, preferably a CFP(R). I would not recommend Ask trusted friends, relatives and co-workers for referrals. A qualified CFP(R) will not only be able to advise you on the best way to save for retirement, but will also be able to advise you on what your actual life insurance needs are.
There are a myriad of rules and tests as to whether it is considered life insurance or a modified endowment contract or ‘MEC’. You can typically only contribute ‘after tax’ premiums, you can only contribute a certain ratio of premiums to death benefit. If you have too much premium relative to death benefit, or if you contribute too quickly, you policy becomes a MEC, and then all distributions become taxable. Your investment choices are limited to what is in the policy, and you cannot change policies as you can IRA accounts.
I would also argue that your target premium might be impractical to maintain a death benefit and still build a large enough cash value to live off of in retirement. Also if your policy ever lapses for any reason, all of your distributions become taxable. The IRS is effectively saying that if you have a life insurance policy with a cash value, you can borrow that cash as effectively an advance on your death benefit.
So let’s say you’re 60 years old, and build up a cash value of $200,000 on your $2,000,000 policy. You withdraw $100,000 to by that sailboat for retirement you always wanted. As you become 66 and 67 and 68 and older, the mortality expense rises on your contract, and perhaps your investments don’t do so well. At some point, your policy runs out of cash value and expires. You have lost your death benefit, and you have a tax burden on that $100,000 distribution that you may have thought was tax-free. The logic for this cause and effect goes back to the premise that the tax advantage stems from this being life insurance; it was not intended for you to buy a boat, or house, or live off in retirement.