No. of Recommendations: 2
..."What do you need the insurance company for?"

Well technically you do not; you could set up something similar for yourself. However, I believe wrapping the investment into a UL policy offers the following benefits.

1. I suspect that the companies have better access to investment grade bonds and other fixed income securities that a retail investor may not. In addition, they are guaranteeing you principal, whereas an individual investor will have to eat the cost of any defaults.

2. You would have to set this up within an IRA to obtain the same tax free compounding.

3. If you do this in a traditional IRA, you will have to pay taxes on the withdrawls.

4. The best vehicle to use would be a roth IRA, in which case you are starting with after tax dollars (the same as you would be funding an IUL with). You would then be able to take tax free withdrawls - which would mimick the tax free loans that you can take from an IUL policy.

5. In an IUL you are able to access the principle and any gains at any time via tax free loans. The roth IRA would only allow tax free access to your contributions before age 59 and a traditional IRA would make early access to your funds even harder. This may be a minor point if you are absolutely planning to use the funds in retirement. But, given that much of this thread has discussed saving for children's college, an IUL would allow easy access to your money to pay for such - whereas the IRAs are not well suited for that (unless you began reproducing in your 40s).

Those are the advantages that I see of using this strategy within an UL policy. Again whether those benefits outweigh the policy fees and the cost of insurance (which may be of little use or even a complete waste to certain individuals), is a complicated question.

Given that I am not a financial advisor, licensed insurance salesman, accountant, or lawyer there may be some errors in my above assumptions.

Not that anyone asked, but from my perspective, IULs are very complicated financial products that are probably not suited for most people. The average individual is probably better off maxing out their 401K/IRA contributions, setting up a 529 plan for their kid's education, and buying a reasonable ammount of term life insurance. However, for that subset of individuals that is already maxing out tax deferred retirement options and has the rest of their financial house in order, it seems like IULs offer an interesting option for tax free growth and distribution of wealth - during one's life or even across generations.

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