Can an IUL Replace a 401(k) for Retirement?

Here’s a question I hear that sounds simple until you actually try to answer it:

“Can I use an IUL instead of a 401(k) for retirement?”

Maybe you’re self-employed and don’t have a traditional employer retirement plan.

Maybe your employer doesn’t offer a 401(k).

Maybe you left your job and you’re rethinking how you want to build the next 10 or 15 years of retirement assets.

Or maybe you’ve simply realized that you don’t want every retirement dollar sitting in an account with the same tax and distribution characteristics.

So can an indexed universal life policy replace a 401(k)?

Not literally.

An IUL is life insurance.

A 401(k) is an employer-sponsored retirement plan.

They operate under different rules, have different tax treatment, different costs, different risks and different purposes.

But that’s not where the conversation should end.

Because the more useful question is:

“Can a properly designed IUL perform some of the retirement-income jobs I expected my 401(k) to perform?”

Now we have something worth analyzing.

What Do You Actually Expect Your 401(k) to Do?

Forget the account name for a minute.

What do you want from it?

You probably want to put money away while you’re working.

You want that money to potentially grow.

You want to accumulate enough that you can eventually stop working.

Then you want to turn the accumulated value into income.

And you want that income to last.

That’s the job.

A 401(k) is one way of trying to accomplish it.

An appropriately structured IUL can potentially address some of those same retirement objectives, but it gets there through completely different mechanics.

An IUL Does Not Become a Retirement Plan Because You Use It for Retirement

This distinction matters.

An IUL doesn’t suddenly become a 401(k), IRA or qualified retirement plan because you’re planning to use the policy’s cash value later in life.

It’s still permanent life insurance.

That means it comes with life insurance underwriting.

It has a death benefit.

It has policy charges.

It has cost of insurance.

It has cash-value mechanics.

It may have policy loans.

And it has contract provisions that don’t exist inside a 401(k).

So if somebody tells you:

“An IUL is basically a 401(k), only better,”

that’s not how I would explain it.

They’re fundamentally different.

A 401(k) Has Advantages an IUL Does Not Have

Let’s give the 401(k) credit where it deserves it.

A 401(k) may provide:

• Employer contributions or matching contributions
• Traditional pretax employee contributions
• Roth contribution options in many plans
• Direct market investment choices
• Plan-specific institutional investment options
• Retirement-plan contribution limits established under federal law
• Plan features and protections governed by applicable retirement-plan law

An IUL doesn’t recreate those features.

If your employer is putting money into your 401(k), an IUL doesn’t magically duplicate that employer contribution.

If you’re receiving a current tax benefit from traditional pretax 401(k) contributions, an IUL premium doesn’t receive the same treatment.

If you want direct ownership exposure to stock or bond investments, an IUL doesn’t provide that either.

So Why Would Anyone Consider an IUL for Retirement?

Because retirement isn’t only an accumulation problem.

It’s also a distribution problem.

And the way money comes out can be just as important as the way it went in.

Someone can spend 30 years asking:

“How big can I make my account?”

Then retire and discover the more important question was:

“How much can I actually spend from it?”

A $2 Million Retirement Account Doesn’t Tell Me Your Retirement Income

Suppose you reach age 65 with $2 million.

Sounds great.

But I still need more information.

Is the $2 million pretax?

Is some of it Roth?

How is it invested?

How much are you planning to withdraw?

What happens if the market falls 25% early in retirement?

What taxes apply to your distributions?

How long does the money need to last?

Are RMDs eventually going to force taxable distributions you don’t need?

The account balance alone doesn’t answer those questions.

The IUL Approaches Retirement Income Differently

An appropriately structured non-MEC IUL may potentially allow access to policy values through withdrawals to basis and policy loans without current income taxation under current federal rules, subject to applicable requirements and policy performance.

That doesn’t mean:

“IUL income is guaranteed tax-free.”

That’s too broad.

Policy structure matters.

MEC status matters.

Basis matters.

Policy loans matter.

Policy performance matters.

Lapse and surrender can create serious tax consequences.

But the potential tax treatment of properly structured policy access is one reason IUL gets evaluated as a retirement-income tool.

An IUL Also Doesn’t Work Like a Stock Account

An IUL isn’t directly invested in the S&P 500.

You don’t own the stocks in the index.

You don’t receive the index dividends.

Instead, indexed interest is determined according to the policy’s applicable crediting terms.

Those terms can include a cap, participation rate, spread or other crediting provisions.

What About the 0% Floor?

Under an indexed strategy with a 0% indexed-crediting floor, a negative index result may produce 0% indexed interest for that applicable crediting period rather than a negative indexed-crediting result.

That’s potentially useful.

But it does not mean your total policy value can never decline.

Policy charges still apply.

Cost of insurance still applies.

Loan costs can apply.

Withdrawals can reduce values.

So when somebody says:

“You can’t lose money because there’s a 0% floor,”

they’re leaving out part of the story.

The Retirement Question Is Really About Functions

Let’s make this practical.

If you’re trying to decide whether an IUL can fill part of the role normally assigned to a 401(k), I would break retirement into several jobs.

Job One: Accumulate money while you’re working.

Job Two: Protect against risks that could derail the plan.

Job Three: Create spendable retirement income.

Job Four: Manage taxes during retirement.

Job Five: Make the money last.

Job Six: Leave something behind if that’s important to you.

A 401(k) and IUL solve those jobs differently.

Job One: Accumulation

A 401(k) can accumulate through employee contributions, possible employer contributions and investment growth.

An IUL accumulates policy value through premiums, applicable credited interest and the policy’s underlying mechanics after policy charges.

With the IUL JUMP Strategy, there’s another component.

The Matching Indexed Participating Loan.

How the IUL JUMP Funding Structure Works

Here’s our common $10,000 annual client-contribution example:

Look closely at Year 11.

The client isn’t writing a $60,000 check.

The client is still contributing:

$10,000 out of pocket.

The additional $50,000 shown comes from the Matching Indexed Participating Loan.

That creates $60,000 of total annual funding shown in this example.

Where Does the Other $50,000 Come From?

This is where the explanation has to be precise.

It isn’t a free contribution.

It isn’t an employer match.

It isn’t a carrier gift.

It isn’t a tax credit.

It’s a policy loan.

The Matching Indexed Participating Loan creates policy indebtedness.

The proceeds are then redeployed into the same policy as additional funding under the JUMP design.

The Loans Don’t Disappear When Another JUMP Happens

This matters.

When the strategy progresses from a $10,000 matching loan to a $20,000 matching-loan level, the earlier loan isn’t simply paid off.

Later loan activity accumulates on top of the existing policy indebtedness.

So if somebody shows you only the increased funding and doesn’t show you the accumulated loans, you’re missing half the picture.

The strategy has to show both.

Why Put Borrowed Money Back Into the Same Policy?

Because the JUMP loan isn’t being used like a normal consumption loan.

If you borrow $30,000 from a life insurance policy and spend it on a boat, those borrowed dollars aren’t sitting inside the policy working anymore.

The JUMP design is different.

The Matching Indexed Participating Loan proceeds are redeployed into the same policy.

That means the loan-funded dollars continue participating under the applicable indexed-crediting strategy.

Think of It as Two Buckets

Bucket One: money you contributed.

Bucket Two: accumulated Matching Indexed Participating Loan money redeployed into the policy.

Under the indexed strategy used in our example, both buckets have the same potential 10% cap and 0% indexed-crediting floor.

The difference is that Bucket Two also carries the applicable policy loan cost.

The Current Applicable Loan Rate Is 5%

With the policy structure we currently use for the IUL JUMP Strategy, the applicable loan rate is currently 5%, with a contractual maximum loan rate of 6% for the applicable loan feature.

That doesn’t mean the applicable rate is guaranteed to remain at 5%.

If you’re building a long-term retirement strategy around these mechanics, I want to see the current 5% rate and a stress test using the 6% maximum.

Now We Get to the Positive-Arbitrage Concept

One historical analysis used with this strategy examined annual S&P 500 price changes from 2006 through 2020.

Dividends were excluded because the policy isn’t directly invested in the index.

The analysis applied a 10% cap and 0% indexed-crediting floor.

Negative annual index price changes were treated as 0% for the indexed-crediting calculation.

Positive annual price changes above 10% were limited to 10%.

Under those assumptions, that historical period produced a:

6.87% average indexed-crediting result.

Be careful with that number.

6.87% is not the historical return of the S&P 500.

It isn’t a guaranteed future IUL crediting rate.

It isn’t a guaranteed policy return.

It’s the historical indexed-crediting result produced by applying those specific cap-and-floor assumptions to that specific period.

6.87% Versus a Current 5% Loan Rate

Under those assumptions:

6.87% – 5.00% = 1.87 percentage points.

That’s the modeled positive spread.

If applicable indexed crediting exceeds the loan cost, the loan-funded portion can experience favorable economics under the model.

But turn the numbers around.

If indexed crediting is 0% and the applicable loan cost is 5%, the economics are unfavorable for that period.

Positive arbitrage is not guaranteed.

Why the Successive JUMPs Can Change the Modeled Retirement Math

Under assumptions used in one JUMP analysis, the combination of the base indexed-crediting assumption and the positive-arbitrage effect attributed to successive Matching Indexed Participating Loans produced modeled effective results of approximately:

• 8.74% at the Year 3 JUMP
• 11.61% at the Year 5 JUMP
• 14.48% at the Year 7 JUMP
• 17.35% at the Year 9 JUMP

Again, label those correctly.

They aren’t S&P 500 returns.

They aren’t indexed-crediting rates.

They aren’t guaranteed policy returns.

They’re modeled effective results under the assumptions used in that analysis, before accounting for applicable policy charges and other factors.

Job Two: Protect Against Risks That Could Derail Retirement

A 401(k) is primarily a retirement accumulation vehicle.

An IUL is life insurance.

That means an IUL includes a death benefit, subject to the terms of the policy.

For someone who actually needs permanent life insurance, that can mean one strategy is addressing both accumulation and a life insurance need.

But don’t buy a life insurance policy simply because you want another retirement account.

The insurance itself should make sense.

Job Three: Turn Accumulated Value Into Retirement Income

This is where the comparison gets much more interesting.

With a traditional pretax 401(k), distributions are generally taxable under current federal rules to the extent applicable.

With a properly structured and maintained non-MEC IUL, policy values may potentially be accessed through withdrawals to basis and policy loans without current income taxation under current federal rules, subject to applicable requirements.

Those aren’t equivalent distribution systems.

And that can materially affect spendable retirement income.

The Retirement-Income Number Is More Important Than the Account Balance

Imagine Strategy A shows $2 million at retirement.

Strategy B shows $1.7 million.

Which one is better?

You still don’t know.

How much can you access each year?

What taxes apply?

What happens after a bad market year?

How long does the projected income last?

What happens to the remaining value?

What happens at death?

Retirement isn’t a contest to see who has the prettiest age-65 balance.

The money has to become a paycheck.

Job Four: Manage Taxes During Retirement

If most of your retirement wealth is sitting in traditional pretax accounts, future distributions can create taxable income under current rules.

That may be perfectly manageable.

But it means you have less tax diversification.

An appropriately structured IUL can potentially create another bucket with different tax characteristics.

That doesn’t make it automatically better.

It makes it different.

And different can be valuable when you’re deciding where retirement income should come from each year.

Job Five: Make the Income Last

This is where sequence risk becomes important.

If you’re taking distributions from market investments while the market is falling, you’re selling more shares to produce the same amount of cash.

Large losses early in retirement combined with ongoing withdrawals can create lasting damage.

An IUL’s indexed-crediting mechanics work differently from direct market investments.

That doesn’t eliminate retirement-income risk.

Policy charges, loan costs, crediting results and policy performance still matter.

But it gives us a different distribution structure to model.

The JUMP Strategy Is Often Modeled With Retirement Distributions Around 12%

In retirement modeling we’ve evaluated for the JUMP Strategy, contributions stop and distributions around 12% per year of the applicable policy/account value may be illustrated under specific assumptions.

Do not read that as:

“Every IUL can safely pay 12% forever.”

That’s not what it means.

The distribution level is part of a specific model.

Its durability is affected by policy values, crediting, policy charges, loan costs, outstanding indebtedness, longevity and other assumptions.

It has to be stress-tested.

Job Six: Leave Something Behind

This is another structural difference.

A 401(k) can certainly be inherited.

But an IUL also has a life insurance death benefit.

Life insurance death benefits are generally received income-tax-free by beneficiaries under current federal law, subject to applicable exceptions.

Outstanding policy indebtedness generally reduces the net death benefit payable under the contract.

So again, the death benefit shown on day one isn’t necessarily the amount beneficiaries ultimately receive.

The policy needs to be evaluated through retirement and death.

So Can the JUMP Strategy Actually Produce More Retirement Income Than a 401(k)?

In certain modeled comparisons we’ve evaluated, the IUL JUMP Strategy has produced up to approximately 300% more projected retirement income than the 401(k), Traditional IRA, or comparable tax-deferred retirement strategy being evaluated.

That’s a significant difference.

And it’s exactly why I don’t want you making the decision based on that number alone.

The 300% Number Has to Prove Itself

Ask where the difference came from.

Was it taxes?

Was it the Matching Indexed Participating Loan structure?

Was it modeled positive arbitrage?

Was it the retirement distribution method?

Was it sequence-of-returns exposure?

Was it longevity?

Was it simply a more favorable assumption on one side of the comparison?

The 300% isn’t the sales pitch. It’s the question.

Show me exactly where the difference comes from.

Give the 401(k) a Fair Fight

If you’re evaluating whether an IUL can replace some of the retirement-income function you expected from a 401(k), don’t intentionally weaken the 401(k) side of the comparison.

Include:

• Actual employee contributions
• Actual employer contributions when applicable
• Vesting provisions
• Traditional and Roth options
• Investment allocation
• Investment expenses
• Plan expenses
• Reasonable growth assumptions
• Projected retirement distributions
• Applicable taxes
• Applicable RMD assumptions
• Projected ending value

Then Give the IUL a Fair Fight Too

Include:

• Actual client premiums
• Death benefit
• Policy charges
• Cost of insurance
• Indexed-crediting assumptions
• Matching Indexed Participating Loans
• Accumulated policy indebtedness
• Applicable loan rates
• Future JUMP assumptions
• Projected retirement distributions
• Policy durability
• Projected net death benefit

Now we’re comparing actual strategies.

Then Try to Break the IUL Projection

This is one of my favorite parts of the process.

If the illustration looks great, make it worse.

Lower the indexed-crediting assumption.

Raise the applicable loan rate from the current 5% to the contractual 6% maximum.

Do both together.

Remove a future JUMP.

Run retirement longer.

Increase the retirement-income need.

Then see what survives.

Don’t just believe the 300% number. Make the strategy prove where the difference comes from with the math.

And Make the 401(k) Stronger

Don’t stress-test only the IUL.

Give the 401(k) stronger market assumptions.

Use actual low-cost investment options if they’re available.

Include the full employer contribution.

Model Roth contributions if they’re available and relevant.

Then compare projected retirement income again.

If the JUMP Strategy still shows a substantial advantage, now the result is much more interesting.

What About the Approximately 40% Difference Versus a Traditional IUL?

There’s another reason the word “IUL” by itself isn’t enough.

In certain modeled comparisons we’ve evaluated, the JUMP Strategy has produced approximately 40% more projected retirement income than the traditional IUL structure being compared.

So even after deciding that an IUL deserves consideration, the policy design still matters.

Two people can each contribute $10,000 per year into an IUL and end up with very different modeled retirement-income outcomes.

Loan structure matters.

Policy costs matter.

Crediting assumptions matter.

Funding design matters.

There’s a Catch With Future JUMPs That You Need to Know

The progression isn’t automatically guaranteed when the first policy is issued.

Each planned future JUMP requires a new application and carrier approval for the increased death benefit.

Qualification can be affected by:

• Health
• Income
• Employment
• Existing insurance
• Driving history
• Occupation
• Hazardous job duties
• Risky hobbies
• Other underwriting factors

If a projection assumes multiple future JUMPs, that underwriting risk needs to be visible.

What Happens If You Don’t Qualify for the Next JUMP?

Under the mechanics we’re discussing, a missed JUMP can pause the progression rather than automatically resetting the strategy.

If you’ve already reached a particular matching-loan level, the prior successful progression doesn’t automatically disappear under the mechanics described here.

You may remain at the previously achieved level and potentially reapply at a later policy anniversary, subject to actual carrier rules and approval.

But the projected retirement income needs to be recalculated.

This Is Why an IUL Can’t Be Treated Like a 401(k) With a Different Name

A 401(k) contribution doesn’t require life insurance underwriting.

Future JUMP progression does.

A 401(k) doesn’t have life insurance cost of insurance charges.

An IUL does.

An IUL has a death benefit.

A 401(k) doesn’t.

A 401(k) can offer employer contributions.

An IUL doesn’t.

The structures are different.

That’s why “replacement” is really the wrong word if we mean the products themselves.

But What If You Don’t Have a 401(k)?

Now we’re getting to one of the situations where this question becomes especially useful.

Maybe you’re self-employed.

Maybe you’re an independent contractor.

Maybe you own a business.

Maybe your employer simply doesn’t offer a retirement plan.

You still need to build retirement income.

An appropriately designed IUL may deserve consideration as one part of that plan.

But it should still be compared with the other retirement vehicles available to you.

Self-Employed Doesn’t Mean IUL Is Your Only Choice

You may have access to retirement arrangements designed for self-employed individuals or business owners.

Those options can offer significant retirement-plan contribution opportunities.

So don’t jump from:

“I don’t have a corporate 401(k)”

to:

“Therefore I need an IUL.”

Compare the available choices.

What If You’ve Already Left Your Employer?

That’s another common situation.

You may have an old 401(k) sitting with a former employer while you’re deciding how to build future retirement assets.

Remember that an existing 401(k) generally cannot simply be rolled directly into an IUL as a tax-free retirement-plan rollover.

The existing retirement account and your future IUL funding are separate questions.

You can evaluate what to do with the old 401(k) while separately deciding where future after-tax cash flow should go.

What If You’re Already 55 or 60?

Now time matters more.

An IUL is a long-term insurance contract.

If you’re 35, you potentially have decades before retirement.

If you’re 60 and planning to retire at 65, you have a much shorter accumulation period.

Underwriting costs, policy charges, funding capacity and the timing of retirement distributions become even more important.

Don’t assume a strategy that looks compelling for a 40-year-old produces the same economics for a 60-year-old.

What If You Need the Money Early?

Liquidity matters.

If you’re going to need a large portion of the money in two or three years, a long-term life insurance strategy may not be the right place for those dollars.

Early policy values can be affected by policy charges and surrender provisions.

Your emergency fund shouldn’t exist only inside a life insurance illustration.

Maybe the Better Goal Isn’t Replacing the 401(k) at All

This is where I think the conversation usually gets better.

Instead of asking:

“Which one should replace the other?”

Ask:

“What retirement buckets do I want to own when I stop working?”

You might want traditional pretax money.

You might want Roth money.

You might want taxable investments.

You might want cash reserves.

You might want appropriately structured life insurance.

Those buckets can solve different problems.

A Retirement Plan Doesn’t Need One Winner

This isn’t a football game.

Your 401(k) doesn’t have to lose for an IUL to make sense.

Your IUL doesn’t have to replace every investment account you own to be useful.

Maybe the strongest plan uses both.

Maybe it doesn’t.

That’s what the math is supposed to tell you.

Here’s the Comparison I Would Run

Suppose you’re 55.

You have $800,000 accumulated for retirement.

You want to retire at 65.

You have another $20,000 per year available to save.

Instead of asking whether IUL “replaces” your retirement account, run several scenarios.

Scenario One: Traditional Retirement Accounts

Put the available retirement savings into the qualified retirement options available to you.

Model the projected growth.

Model the taxes.

Model the projected retirement income.

Model the ending value.

Scenario Two: IUL JUMP Strategy

Model the available premium into the JUMP Strategy.

Show policy charges.

Show the Matching Indexed Participating Loans.

Show the outstanding indebtedness.

Show future JUMP assumptions.

Show retirement distributions.

Show policy durability.

Scenario Three: Use Both

Split the available retirement savings.

Put some into retirement accounts.

Put some into the appropriately structured IUL.

Then see whether tax diversification and different retirement-income sources improve the overall result.

Then Compare What You Can Actually Spend

Not the sales illustration.

Not the account statement.

Not the biggest number at age 65.

Ask:

“How much projected spendable income can this strategy provide through retirement?”

Then ask:

“What had to go right for that number to work?”

That’s Where the Real Decision Lives

If one strategy shows $100,000 of projected annual retirement income and another shows $200,000, don’t stop there.

Ask why.

If one shows $300,000, ask even harder.

The bigger the difference, the more I want to understand the assumptions.

The number isn’t the reason to buy it. The assumptions behind the number are what you need to understand.

The Emotional Part of This Decision Is Bigger Than People Admit

When you’re 58 or 62, you’re not casually experimenting with money.

You’re staring at the money that’s supposed to replace your paycheck.

You may have spent 30 years following the same formula.

Work.

Save.

Put money into retirement accounts.

Don’t touch it.

Then someone shows you a completely different strategy.

Part of you is curious.

Part of you is thinking:

“Why haven’t I heard about this before?”

And another part is thinking:

“What if this is too good to be true?”

You Don’t Want to Discover the Mistake at 75

That’s the real fear.

Not losing an argument about which retirement product was better.

Making a decision at 60 that you wish you could undo at 75.

“What if we mess this up and regret it?”

That’s why every major assumption needs to be visible before you commit.

Because This Is Really About Independence

You want enough income to live the way you planned.

You want to make your own decisions.

You want to handle unexpected expenses.

You want the money to last if one of you reaches 95.

You don’t want your children becoming your emergency retirement plan.

“I don’t want to ask my kids for help.”

“We should be able to handle this ourselves.”

That’s the outcome the strategy needs to protect.

So, Can an IUL Replace a 401(k) for Retirement?

An IUL cannot literally replace a 401(k) as the same type of financial account.

They’re fundamentally different.

But an appropriately designed IUL may potentially perform some of the retirement functions that people normally expect from a 401(k), including long-term accumulation and creating a source of retirement distributions.

It also brings features a 401(k) doesn’t have, including permanent life insurance and different potential tax characteristics for accessing policy values when structured and maintained properly.

At the same time, it does not provide every advantage available through a 401(k), such as employer contributions, retirement-plan contribution treatment or direct market investment options.

So the question isn’t:

“Which product wins?”

The question is:

“Which combination gives me the strongest retirement outcome?”

How We Test That at FPP Financial

At FPP Financial, we use our Retirement Math Method™.

I don’t want to tell you:

“Replace your 401(k) with an IUL.”

I want to show you what each strategy is projected to do.

Give the 401(k) its employer contribution when one exists.

Give it its traditional or Roth tax treatment.

Give it reasonable market assumptions.

Give it actual expenses.

Then model the IUL JUMP Strategy.

Show the policy costs.

Show the Matching Indexed Participating Loans.

Show the outstanding indebtedness.

Use the current 5% applicable loan rate.

Stress-test the contractual 6% maximum.

Lower the indexed-crediting assumption.

Remove a future JUMP.

Run retirement to 95.

Then compare projected spendable retirement income.

I don’t try to sell you on the strategy. I make the strategy prove itself with the math.

Want to See Whether an IUL Can Fill a Retirement-Income Gap in Your Plan?

If you’re wondering whether you need a 401(k), an IUL, both, or a completely different mix of retirement buckets, we can model the alternatives.

We’ll look at what you already have.

We’ll look at how much you’re saving.

We’ll look at the tax characteristics of your existing retirement money.

We’ll model the retirement-account strategy.

We’ll model the IUL JUMP Strategy.

We’ll look at the Matching Indexed Participating Loan mechanics.

We’ll include policy costs and indebtedness.

We’ll test the current 5% applicable loan rate and the contractual 6% maximum.

We’ll lower the indexed-crediting assumptions.

We’ll test future JUMP approvals.

We’ll run retirement longer.

Then we’ll compare projected retirement income.

If the traditional retirement strategy produces the stronger modeled result, you should see it.

If combining the strategies produces a stronger result, you should see it.

If the JUMP Strategy produces substantially more projected retirement income in your comparison, you should see exactly where the difference comes from.

The 300% isn’t the sales pitch. It’s the question.

Show me exactly where the difference comes from.

Let the math do the talking.

Schedule Your Tax-Free Retirement Strategy Meeting

Explore More

• IUL JUMP Strategy vs. 401(k): Which Can Produce More Retirement Income?
• Should You Max Out Your 401(k) Before Funding an IUL?
• Can You Roll a 401(k) Directly Into an IUL?

Disclosure

This material is for educational purposes only and is not intended as individualized investment, securities, tax, legal, retirement-plan or insurance advice. A 401(k) and indexed universal life insurance are fundamentally different financial arrangements. An IUL is permanent life insurance and is not a 401(k), IRA, qualified retirement plan, brokerage account or direct substitute for the legal, tax or plan features of an employer-sponsored retirement plan.

401(k) plans are governed by applicable law and individual plan provisions. Contribution limits, employer contributions, matching formulas, vesting, investment options, Roth availability, expenses, withdrawal provisions and other features vary by plan and may change. Employer contributions can materially affect a comparison between a 401(k) and an IUL and should be included when applicable.

Traditional pretax 401(k) contributions and Roth 401(k) contributions have different federal income-tax treatment. Traditional pretax distributions are generally taxable under current federal rules to the extent applicable. Qualified Roth distributions are generally tax-free under current federal rules when applicable requirements are satisfied. Required minimum distribution rules and other retirement-account rules may apply under current law.

Market-based investments held within a 401(k) can fluctuate in value and can lose principal. Past performance does not guarantee future results. Investment options, plan expenses and investment expenses vary.

Indexed universal life insurance does not directly invest in a market index, does not own the underlying index securities and does not receive index dividends. Indexed interest is determined according to applicable policy crediting terms, which may include caps, participation rates, spreads and other provisions.

A 0% indexed-crediting floor does not guarantee that overall IUL policy value cannot decline. Policy charges, cost of insurance, loan costs, withdrawals and other policy mechanics continue to apply. Caps, participation rates, spreads, loan rates and other nonguaranteed elements may change when permitted by the insurance contract.

Policy loans are actual policy indebtedness and generally accrue applicable loan charges. Loans and withdrawals can reduce policy values and death benefits and may increase lapse risk. Outstanding policy indebtedness generally reduces the net death benefit payable under the insurance contract.

Policy values from a properly structured and maintained non-MEC life insurance policy may potentially be accessed through withdrawals to basis and policy loans without current income taxation under current federal rules, subject to applicable requirements. Tax treatment can be affected by basis, Modified Endowment Contract status, policy lapse, surrender and other circumstances. A policy that lapses or is surrendered with gain and outstanding indebtedness may create taxable income.

Life insurance death benefits are generally received income-tax-free under current federal law, subject to applicable exceptions. Outstanding policy indebtedness generally reduces the net death benefit payable.

Matching Indexed Participating Loans are policy loans. They are not employer contributions, free carrier contributions, bonuses, tax credits, guaranteed gains or direct investments in a market index. Under the JUMP Strategy described here, Matching Indexed Participating Loan proceeds are modeled as being redeployed into the same policy as additional funding. Associated indebtedness and applicable loan costs remain part of the policy economics.

The JUMP Strategy is modeled with applicable loan charges carried forward during the accumulation design rather than requiring the client to pay those charges out of pocket each year. This does not eliminate the economic cost of borrowing, guarantee positive arbitrage or guarantee that policy values will remain sufficient to support outstanding indebtedness.

References to retirement distributions around 12% of applicable policy/account value refer to specific modeled scenarios and should not be interpreted as a universal or guaranteed withdrawal rate. The ability of a policy to support distributions is affected by actual policy performance, indexed-crediting results, policy charges, loan costs, indebtedness, distribution timing, longevity and other factors.

References to the $10,000 annual contribution example, JUMP progression, 6.87% historical indexed-crediting example, 1.87 percentage-point modeled positive spread, modeled effective results of 8.74%, 11.61%, 14.48% and 17.35%, current 5% loan rate, contractual maximum 6% loan rate, approximately 40% more projected retirement income, or up to approximately 300% more projected retirement income are illustrative and are not guarantees of future policy performance, positive arbitrage, policy durability, funding capacity, non-MEC status, future JUMP approval, death benefit or retirement income.

The up-to-approximately-300% projected retirement-income result cited in this article refers to certain modeled comparisons involving the IUL JUMP Strategy and a 401(k), Traditional IRA or comparable tax-deferred retirement strategy. It should not be interpreted as a representation that an IUL universally replaces or outperforms a 401(k), as a recommendation to stop retirement-plan contributions, or as a guarantee that an individual comparison will produce the same result. Actual employer contributions, traditional and Roth treatment, investment assumptions, expenses, taxes, IUL policy charges, loan assumptions, underwriting and other relevant factors should be incorporated into an individual comparison.

The approximately-40% projected retirement-income result refers to certain modeled comparisons involving the JUMP Strategy and the traditional IUL structure being evaluated. It is not a universal result and does not guarantee future retirement income.

The historical 6.87% indexed-crediting example discussed in this article is based on an analysis of annual S&P 500 price changes from 2006 through 2020, excluding dividends, and applying the stated 10% cap and 0% indexed-crediting floor. Historical results do not predict future policy performance. The modeled effective JUMP results discussed above are not S&P 500 returns, indexed-crediting rates or guaranteed policy returns.

Positive arbitrage is not guaranteed. Periods in which indexed crediting is below the applicable loan cost can produce unfavorable loan economics. Policy charges and other expenses must also be considered when evaluating overall policy performance.

Future JUMPs and associated death-benefit increases are subject to carrier approval and applicable medical, financial, occupational and other underwriting requirements. Future approval is not guaranteed. Income, employment, health and other circumstances can affect future underwriting. Failure to complete a planned future JUMP can materially change projected funding, policy values, indebtedness, death benefits and retirement-income results.

Policy-specific guarantees, nonguaranteed elements, loan provisions, loan rates, caps, participation rates, spreads, crediting methods, expenses, surrender provisions, MEC testing, lapse provisions and death-benefit provisions should be verified against current carrier-approved illustrations and the actual insurance contract.

FPP Financial does not provide tax or legal advice. Consult qualified tax, legal, retirement-plan and financial professionals regarding your individual circumstances before changing retirement-plan contributions, purchasing life insurance or implementing any strategy discussed here.