How Much Should You Put Into an IUL Each Year for Retirement?

“How much should I put into an IUL every year?”

It sounds like a simple question.

$5,000?

$10,000?

$25,000?

More?

But if you’re using indexed universal life insurance as part of a retirement-income strategy, the number you’re willing to contribute is only the beginning of the calculation.

You also need to know how much the policy can properly accept, how much life insurance you can qualify for, how close the policy is being funded to applicable MEC limits, how long you have until retirement, what the policy costs, and what kind of retirement income those contributions may ultimately support.

And with our IUL JUMP Strategy, there’s another question:

How much money could eventually be working inside the strategy compared with what you’re actually contributing out of pocket?

Those can become two very different numbers.

There Is No Universal “Perfect” IUL Contribution

I wouldn’t tell everyone to put $10,000 a year into an IUL.

I wouldn’t tell everyone to put $25,000 in either.

Someone earning $300,000 with significant excess cash flow and someone earning $90,000 while trying to pay off credit cards shouldn’t automatically be funding the same policy.

Even two people who can comfortably afford $20,000 a year may need different designs.

Age matters.

Health matters.

Income matters.

The amount of life insurance that can be financially justified matters.

Your retirement timeline matters.

Your other assets matter.

And most importantly, the policy has to be something you can realistically maintain.

A beautifully illustrated policy that requires you to contribute more than you can comfortably afford isn’t a good retirement strategy.

Start With an Amount You Can Actually Sustain

I’d rather see someone build a strategy around a contribution they can reasonably maintain than chase an illustration built around a number that looks impressive.

Imagine you’re comfortable contributing $10,000 annually.

Then someone shows you how much better the illustration looks at $20,000.

That doesn’t mean you should force $20,000 into your budget.

Retirement planning still has to coexist with real life.

You have a mortgage.

You may have kids in college.

You may be helping aging parents.

You need emergency savings.

You may want to travel.

You may have other retirement accounts you’re funding.

The right starting contribution shouldn’t leave you feeling trapped by your insurance premium.

But an IUL Designed for Retirement Usually Needs to Be Funded Intentionally

This is where policy design matters.

If the goal is primarily retirement accumulation and future access to policy values, simply buying a large amount of life insurance and paying the smallest premium possible may not create the result you’re expecting.

You’re trying to balance two objectives:

Maintain the life insurance structure while creating enough funding capacity to build meaningful policy value.

That requires careful design.

And there is a limit to how aggressively a policy can be funded before tax rules become a major consideration.

Why the MEC Limit Matters

A Modified Endowment Contract, or MEC, is a life insurance policy that has crossed applicable federal funding limits and is therefore subject to different tax treatment for distributions and policy loans.

That matters when the reason you’re considering the policy is future access to cash value.

You can’t simply say:

“If $10,000 is good, I’ll put in $100,000 instead.”

The policy has to be designed to accept the intended funding while maintaining the desired tax classification.

This is one reason the amount of death benefit matters.

And it’s a major reason death-benefit increases are built into the IUL JUMP Strategy.

Here’s Where JUMP Changes the Funding Question

With a traditional IUL, you might ask:

“How much am I contributing every year?”

With JUMP, I want you to ask two questions:

“How much am I contributing?”

and

“How much total funding is potentially being created inside the strategy?”

Let’s use the $10,000 annual example.

The client contributes $10,000 in Year 1.

They contribute another $10,000 in Year 2.

Then, after a successful JUMP and the required carrier approval, a Matching Indexed Participating Loan can be introduced.

Now the client’s $10,000 out-of-pocket contribution can be combined with additional loan-funded dollars that are redeployed back into the policy.

Here’s What That Can Look Like

Look at what isn’t changing.

The client’s annual out-of-pocket contribution remains $10,000 in this simplified example.

What’s changing is the amount of additional policy-loan-funded money being redeployed into the strategy after successful JUMPs.

That’s why saying, “The client puts $60,000 into the policy in Year 11,” would be misleading.

They don’t.

The example shows $60,000 of total annual funding, consisting of:

$10,000 client contribution + $50,000 Matching Indexed Participating Loan.

The Extra $50,000 Isn’t Free Money

This is the part I never want glossed over.

The additional money is created through a policy loan.

It’s borrowed money.

The loan carries a cost.

The loan remains outstanding.

And the loans accumulate as the strategy progresses.

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.

The current 5% rate isn’t a promise that it will stay there.

So why use the loan?

Because the loan proceeds aren’t being taken out and spent.

They’re redeployed into the policy.

The Loan-Funded Dollars Go Back to Work

Under the indexed strategy we’re discussing, the loan-funded dollars have the same indexed-crediting potential as the client’s original contribution, subject to the applicable 10% cap and 0% indexed-crediting floor.

Think about the policy as two buckets.

Bucket One: the money you contributed.

Bucket Two: the Matching Indexed Participating Loan money.

Both buckets have indexed-crediting potential under the applicable strategy.

Bucket Two carries the corresponding loan cost.

That’s where potential positive arbitrage can enter the calculation.

What Does Positive Arbitrage Have to Do With How Much You Should Contribute?

Quite a bit.

The purpose of the Matching Indexed Participating Loan isn’t simply to make the annual funding column look bigger.

The strategy is trying to create additional dollars that can potentially participate in indexed crediting while carrying a known contractual loan structure.

In the historical analysis we’ve been using, annual S&P 500 price changes from 2006 through 2020 were run through the indexed-crediting assumptions of a 10% cap and 0% floor, excluding dividends.

That historical exercise produced a 6.87% average indexed-crediting result.

The policy isn’t directly invested in the S&P 500.

The client doesn’t own the stocks.

And the policy doesn’t receive S&P 500 dividends.

The index is being used to determine interest crediting under the applicable formula.

Now compare the historical example with the current loan cost:

6.87% historical indexed-crediting result – 5.00% current loan rate = 1.87 percentage points of modeled positive spread.

That’s the positive-arbitrage concept.

But it’s not guaranteed.

What If the Policy Gets 0% Indexed Crediting?

The loan doesn’t stop costing money just because the index had a bad year.

If the applicable indexed-crediting result is 0% and the applicable loan rate is 5%, the borrowed dollars aren’t creating positive arbitrage during that period.

The loan cost is still there.

That’s why I don’t want someone hearing:

“We borrow at 5% and earn 6.87%, so we make 1.87%.”

That’s too simplistic.

The 6.87% is a historical average indexed-crediting result from the period analyzed.

Actual annual results can be higher or lower, subject to the applicable policy terms.

Some periods can create positive arbitrage.

Others may not.

Why Not Just Start With a Much Bigger Contribution?

You might be wondering:

“If we’re eventually trying to get $60,000 working inside the strategy, why don’t I just put $60,000 in from the beginning?”

There are several problems with that assumption.

First, you may not want to contribute $60,000 out of pocket every year.

Second, the policy needs sufficient funding capacity under the intended design.

Third, the amount of life insurance needs to be supported by applicable underwriting and financial justification.

Fourth, MEC rules have to be considered.

And fifth, the JUMP strategy is specifically designed around increasing funding capacity through planned death-benefit increases and Matching Indexed Participating Loans rather than simply assuming the client writes an increasingly larger check.

Why Does the Death Benefit Need to Increase?

The JUMPs aren’t arbitrary.

At planned points in the strategy, additional death benefit is requested to create the additional funding capacity needed for the next stage while maintaining the intended non-MEC structure.

In the simplified example, those JUMPs occur in Years 3, 5, 7, 9 and 11.

But here’s the catch:

You have to qualify for each additional increase.

Your Future Health and Income Can Affect How Far You JUMP

Each future death-benefit increase requires carrier approval.

That means future underwriting can consider factors such as:

• Health
• Income
• Employment
• Financial justification for the additional insurance
• Driving history
• Occupation
• Hazardous job responsibilities
• Risky hobbies or activities
• Other applicable underwriting considerations

Someone could qualify for the original policy at age 45 and then have a serious health event before a future JUMP.

Or their income could fall substantially.

Or they could lose their job.

Those changes could prevent approval of the next requested death-benefit increase.

That’s why I would never show someone the Year 11 $60,000 funding example and tell them:

“This is definitely where you’ll end up.”

The future JUMPs require future approval.

What If You Can’t Qualify for the Next JUMP?

Under the structure we’re discussing, you don’t automatically lose the matching-loan level you’ve already established simply because the next increase isn’t approved.

Suppose you’ve reached:

$10,000 client contribution + $30,000 Matching Indexed Participating Loan = $40,000 of annual funding.

Then your next planned JUMP isn’t approved.

Under the structure we’re discussing, you can remain at the previously established $30,000 matching-loan level, subject to the actual policy contract and carrier rules.

You may then have the opportunity to reapply for the next JUMP at a future policy anniversary if your circumstances improve and you qualify.

So a missed JUMP can potentially pause the progression rather than automatically erase what you’ve already established.

But it can still change the eventual retirement-income projection.

Does Your Income Matter When Funding an IUL?

Yes, but not because the policy has an IRA-style income eligibility limit.

Income can matter because this is life insurance.

The carrier has to be able to financially justify the amount of death benefit being requested.

If the policy design requires substantially more insurance than your financial circumstances support, the carrier may not approve it.

That becomes especially important with JUMP because future stages can require additional death benefit.

Someone can’t simply say:

“I want $10 million of additional life insurance so I can put more money into the strategy.”

The insurance still has to make sense under applicable underwriting guidelines.

What About Someone Who Can Afford $25,000 or $50,000 a Year?

Now the math becomes interesting.

A $10,000 annual contribution is just an easy example.

It’s not a recommendation or a limit.

Someone with substantially more available cash flow may be able to evaluate a larger policy design, subject to insurance need, underwriting, MEC considerations and the rest of the person’s financial situation.

But I wouldn’t automatically assume that putting in the largest possible amount produces the best retirement strategy.

The real question is:

What does each additional dollar of contribution actually buy you in projected retirement income?

That’s something we can model.

Compare $5,000, $10,000, $20,000 and $25,000

If you’re trying to decide how much to contribute, don’t guess.

Run several scenarios.

What happens if you fund $5,000 annually?

What happens at $10,000?

What happens at $20,000?

What happens at $25,000?

How much projected cash value does each scenario create?

How much death benefit is required?

What policy charges are involved?

How do future JUMPs change?

How much outstanding loan balance develops?

And most importantly:

How much projected spendable retirement income does each scenario produce?

That’s a much better way to choose a contribution than saying:

“$10,000 sounds about right.”

Don’t Put So Much Into an IUL That You Become Cash Poor

This is one of the biggest practical mistakes someone can make.

You can become so focused on maximizing a long-term strategy that you leave yourself without enough liquid money outside of it.

That’s not a position I want you in.

Life happens.

Roofs need replacing.

Cars die.

Jobs disappear.

Medical expenses happen.

Children need help.

If every available dollar is committed to a long-term life insurance strategy, you may end up creating a liquidity problem while trying to solve a retirement problem.

Your annual contribution needs to make sense alongside the rest of your finances.

What If You Can’t Keep Making the Same Contribution?

This needs to be considered before the policy is issued.

IUL is flexible-premium life insurance, but “flexible” shouldn’t be interpreted as “nothing matters if I stop funding it.”

If the policy was illustrated around a certain funding schedule and actual contributions are materially lower, projected values can change.

That can affect future policy durability and retirement-income projections.

So when we’re choosing an annual contribution, I want to know:

Can you reasonably keep doing this?

Not just this year.

For the period the strategy is designed around.

How Can the Funding Strategy Lead to More Retirement Income?

This is ultimately why we’re having the conversation.

We’re not trying to win an award for putting the most money into an insurance policy.

We’re trying to create retirement income.

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 is not a 300% return.

It’s not guaranteed.

And it doesn’t mean putting $10,000 into an IUL automatically gives you three times the retirement income of putting $10,000 into a 401(k).

The modeled difference can be affected by:

• Client contributions
• Successful future JUMPs
• Additional borrowed-and-redeployed policy funding
• Indexed-crediting results
• Positive and negative arbitrage
• Loan costs
• Policy expenses
• Tax treatment of the strategies being compared
• Market and sequence-of-returns exposure
• Retirement distribution design
• Longevity

If someone tells you “300% more” and can’t show you where the difference came from, don’t buy the number.

Make them prove it.

The Contribution Question Is Really a Retirement-Income Question

If you’re 45 and trying to decide whether to put $10,000 or $20,000 into a strategy, that decision can feel like it’s only about your budget today.

It isn’t.

You’re making a decision about the person you’ll be at 65.

And 75.

And 85.

What will $10,000 today potentially create later?

What would $20,000 create?

How much liquidity are you giving up?

What risks are you accepting?

How much income might the strategy support?

What happens if future JUMPs aren’t approved?

That’s the math that matters.

You Don’t Want to Discover at 65 That You Funded the Wrong Number

There’s an emotional side to this decision too.

You don’t want to look back after ten or twenty years and think:

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

You want retirement to feel like something you can handle.

“We should be able to handle this ourselves.”

And for a lot of people, the fear underneath the financial planning is even simpler:

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

That’s why I don’t think your annual contribution should come from a rule of thumb.

It should come from the retirement result you’re trying to create and the amount you can reasonably sustain.

How We Determine How Much to Fund

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

Instead of telling you:

“Put $10,000 into this policy because that’s what most people do,”

I want to run the numbers.

Show me $5,000.

Show me $10,000.

Show me $20,000.

Show me $25,000.

Show me what each one could potentially produce.

Then show me the JUMPs.

Show me the Matching Indexed Participating Loans.

Show me the accumulating loan balance.

Show me the current 5% loan rate.

Then stress-test the contractual maximum we’re evaluating.

Show me lower indexed-crediting results.

Show me what happens if a future JUMP isn’t approved.

Show me the policy charges.

Show me retirement income.

Show me policy values later in life.

Then compare it against the other places that same contribution could go.

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

Want to Know What Your Annual IUL Contribution Should Look Like?

Don’t choose the number because somebody on the internet told you that $10,000, $20,000 or $50,000 is the “right” amount.

We can model different contribution levels around your actual situation.

Then you can see what each one does to projected policy values, JUMP funding, loan balances and retirement income.

And you can compare those results with what you’re already doing.

Let the math do the talking.

Schedule Your Tax-Free Retirement Strategy Meeting

Explore More

• How Can $10,000 a Year Turn Into $60,000 of Annual IUL Funding?
• What Is the IUL JUMP Strategy and How Does It Work?
• What Is a Matching Indexed Participating Loan in an IUL?

Disclosure

This material is for educational purposes only and is not intended as individualized investment, tax, legal or insurance advice. Contribution amounts and policy-funding examples are illustrative and are not recommendations for any particular person. Indexed universal life insurance is a long-term life insurance product with policy charges, cost of insurance, surrender considerations, underwriting requirements and other contractual provisions.

Matching Indexed Participating Loans are policy loans, not free contributions, bonuses, guaranteed gains or direct investments in a market index. Policy loans and withdrawals reduce available policy values and death benefits and may increase the risk of policy lapse. A lapse or surrender of a policy with outstanding loans may create taxable income. Modified Endowment Contracts are subject to different tax rules.

References to the $10,000 contribution example, Matching Indexed Participating Loan progression, 6.87% historical indexed-crediting example, 1.87 percentage-point modeled positive spread, current 5% loan rate, contractual maximum loan rate, or up to approximately 300% more projected retirement income are illustrative and are not guarantees of future policy performance, funding capacity, positive arbitrage, policy durability or retirement income.

The historical 6.87% indexed-crediting example discussed in this article is based on the historical analysis described for 2006 through 2020 using annual S&P 500 price changes, excluding dividends, and applying the stated 10% cap and 0% indexed-crediting floor. Historical results do not predict future policy performance. The S&P 500 is an external market index. An indexed universal life policy does not directly invest in the S&P 500, does not own the underlying stocks and does not receive index dividends.

A 0% indexed-crediting floor does not guarantee that overall policy value cannot decline. Policy charges, cost of insurance, loan costs and other policy mechanics continue to apply. Positive arbitrage is not guaranteed. Periods in which indexed crediting is below the applicable loan cost can produce unfavorable loan economics.

Future JUMPs and death-benefit increases are subject to carrier approval and applicable medical, financial and other underwriting requirements. Health, income, employment, occupation, driving history, hazardous activities and other factors may affect eligibility. A projected JUMP schedule should not be interpreted as a guarantee that future increases will be approved.

Policy-specific premium limits, MEC testing, loan provisions, loan rates, guarantees, nonguaranteed elements, caps, participation rates, spreads, crediting methods, policy expenses, death-benefit provisions and other contractual terms should be verified against the current carrier-approved illustration and actual insurance contract. Tax treatment varies with individual circumstances and policy status. Consult qualified tax and legal professionals regarding your individual situation.