The Value of the Indexed Universal Life Bucket

If you’ve spent any time researching retirement planning, you’ve probably heard about the bucket approach. Essentially, bucketing is an income strategy that involves breaking your portfolio apart into three segments so that the cash you’ll need soonest (short term) is invested in low-risk, easy-to-liquidate positions such as money markets, short-term CDs and T-bills.  Cash you’ll need in five to ten years (medium term) is invested in longer-term bonds and CDs as well as mutual funds and stocks, and the final bucket (long-term) remains invested in mutual funds, ETFs and/or stocks with more aggressive growth potential so it can continue accumulating enough to last throughout retirement.  As you run out of money in the first short-term bucket, you begin to liquidate holdings in the medium-term bucket and move them to the short-term bucket while transitioning some of your long-term investments into the medium-term bucket.  One of the biggest benefits of the bucket approach is that it allows your long-term investments to remain untouched during bear markets, so you don’t liquidate positions and lock in losses. Many people aren’t aware that there is a fourth bucket that can be used for income needs throughout your retirement, and that is the cash value growth within an indexed universal life (IUL) insurance policy. 


Understanding the IUL bucket 


With interest rates at historic lows, many retirees and pre-retirees setting up their short-term buckets are concerned about the inability to find short-term, low-risk, liquid investments that can still outpace inflation.  IUL policies solve this need by allowing policyholders to increase the policy’s cash value by an amount that’s based on the performance of a chosen index, offering the policyholder far higher interest potential.  However, these policies also have what’s called a “floor” that prevents policyholders from losing money during market downturns.  Because an IUL policy mixes security with upside potential, retirees can gain competitive rates along with protection against downside risks.


Locking in gains, preventing losses 


One of the benefits of the bucket approach is that a retiree can keep the bulk of his or her investments tied to the market so that, during a bear market, they can continue to hold their positions until the market recovers rather than being forced to liquidate and lock in the losses. IUL policies, on the other hand, have a far better system. Not only do these policies expose owners to some of the upside potential of their chosen indices during bull market years, they also lock in those gains and have a floor or minimum return during the bear market years so there is no loss. 


Solving the tax problem 


Yet another benefit of having an IUL policy as a fourth bucket is that loans can be taken tax-free. Taxes can quickly reduce the value of the income you’re pulling out of your retirement buckets, which can prevent the money from stretching as far as you need it to. During high-tax years pulling added funds out of an IUL policy not only gives you access to tax-free cash but also helps you avoid breaking into the next tax bracket. 


The biggest fear of retirees is that they will run out of money. It’s a reasonable concern to have, and one that a bucket approach can help prevent. With an IUL running point on both short- and long-term income needs, it’s a fear that can realistically be overcome.


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By Suzy Turner, Senior Financial Services Manager, Global Financial Distributors