What are the advantages of saving in an EIUL over saving in a Mutual Fund?
From a financial planning perspective there are three very big unknowns/problems with saving for retirement using a mutual fund inside a 401K/IRA. These issues are rarely discussed but have put many a carefully planned retirement into disarray. Quite frankly, the way our brains work, make it unlikely that we take these issues seriously when we begin our retirement savings plan.
How much money will I have on the day I retire?
You can control how much you put into your retirement plans. You can even get a pretty good estimate of your long-term rate of return. But the killer issue is the sequence of returns. If you have your retirement money in a highly variable financial vehicle [like mutual funds], then you are at a huge risk of retiring right after or right before a major negative event has caused a severe decline in your account value. In fact the odds are over 90% of this happening. And if this happens it can severely change the amount of income you can extract. So much in fact that large groups of people have had to put off their retirement for years or have found their money only lasted them half as long as they thought, no matter how frugal they become.
EIULs solve this issue by using a strategy that does not go negative. Your cash value in your policy doesn't disappear before your eyes just because an economic event has driven the stock markets down. How much more sleep will you get when you use an EIUL rather than mutual funds?
How much tax will I owe the government?
Our government is running huge deficits, but has increasing obligations. How will this be solved? Do you think taxes will go down? Do I really want to push the tax obligation into the future with so much uncertainty? Or does it make more sense to move as much of my money into a tax-protected vehicle? Do I really want my ability to access the full amount of my wealth to be controlled by a series of tax rules and regulations that are at the whim of the politicians?
When structured correctly, money put into an EIUL can be accessed without incurring a tax obligation ANY TIME you desire.
How long am I going to live?
The typical 40-year-old man does not really think about the possibility of not making it to retirement. Maybe he should. In fact a full 20% or 1 out of every 5 40-year-old men will die before reaching retirement. And 11% will be dead before age 60. On the other end, 16% of 40-year-old men will still be alive at age 90. There is a lot of uncertainty in how long we live that needs to be planned for. As you can see more than one out of every three of our 40 year-old-men will either die early or live to 90! For women, the odds are different, but the problem the same [13% of 40 year olds will die before retirement while 27% will still be alive at 90].
So what happens to your spouse and family if you are unlucky and join that group that dies early [I know, can't possibly be you!]? We know that people really don't start to save for retirement in earnest until they hit their early 50s. Well if you were saving in an EIUL your family's financial plan is not devastated and in fact might even be complete. And if you live a long life, your money has lasted longer because you haven't had to pay income taxes on the money you have used from your life insurance policy. No one knows how long he or she will live, but doesn't it make sense to at least account for the possibilities of living too short a life or longer than average?