IUL White Paper

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White Paper - 401K, IRA or IUL, After the Cares Act 2020?

  • The CARES Act, passed in 2020, brought several changes to the IRS codes 7702 and 101(a), which impacted the Index Universal Life (IUL) insurance policies, along with other life insurance policies. 
  • Changes to retirement accounts and insurance policies to provide financial relief during the COVID-19 pandemic. However, the effect was indirect, it didn’t directly alter the IRS codes 7702 and 101(a).
  • IRS Code 7702 defines what constitutes a life insurance contract for tax purposes. It sets the minimum death benefit that a policy must have relative to its cash value to qualify as a life insurance contract and receive tax advantages, like tax-free death benefits and deferred cash value growth.
  • IRS Code 101(a) generally states that death benefits paid by a life insurance policy are not included in the gross income of the recipient, and therefore not subject to income tax.
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  • Index Universal Life (IUL) Insurance is a type of permanent life insurance policy that has a cash value component, which can be invested in index-linked options. IUL policies provide a death benefit and also have a cash value component that grows on a tax deferred basis.
  • The cash value in an IUL policy can be accessed via policy loans or withdrawals. Policy loans are generally not taxable, as they are considered debts, not distributions. However, if the policy lapses or is surrendered with a loan outstanding, the loan balance becomes taxable.
Tuition Arbitrage

Cares Act Effect on 401K, IRA or IUL.

401K and IRA: These are tax-advantaged retirement accounts. You contribute pre-tax dollars, your investments grow tax-free, and then you pay taxes when you withdraw the money in retirement. The CARES Act allowed for increased borrowing limits from 401K plans and waived the 10% early withdrawal penalty on distributions up to $100,000 for those under 59 1/2. It also allowed for the deferment of Required Minimum Distributions (RMDs) for 2020.

Index Universal Life Insurance: This is a type of permanent life insurance that also offers a cash value component that can grow over time. The cash value can be invested in index options (e.g., S&P 500) and grows tax-deferred. You can take loans against the cash value, which are not taxable. The changes to the IRS codes 7702 and 101(a) impacted the minimum interest rates used for calculating the premiums and cash values of these policies, which could potentially allow for higher cash value accumulation.


The Cares Act Allows an IUL to Duplicate a Bank: In the Cares Act scenario the IUL created for Hybrid Arbitrage is similar to a Bank Owned Life Insurance (BOLI), the owner can borrow against the money used to overfund the IUL policy (i.e., the cash value), they are not borrowing against the death benefit. This BOLI style IUL is liquid, without surrender charges, or caps, the owner’s liabilities can be used to overfund the policy.

Financial Wellness

Benefits of a Hybrid Arbitrage IUL

1. Purpose:

  • IUL: Provides a death benefit, the funds from an IUL policy can be used for any purpose including debt elimination and the opportunity for cash value accumulation. The benefits of using debt to reduce the pay-off time and interest, also known as “debt elimination,” involve using the cash value of an IUL policy to pay down debt while continuing to earn interest on the borrowed amount. This strategy aims to optimize cash flow, minimize interest paid, and increase wealth accumulation because the tax-free loans never have to be paid back.
  • 401(k) and IRA: Primarily designed for retirement savings, whereas there might be penalties for early withdrawals or non-qualified expenses from a 401K or IRA

2.  Investment Limit:

  • IUL: There is no legal limit on the amount you can invest in an IUL policy. No legal limit on the premium, but it must be within the boundaries set by IRS Code 7702.
  • 401(k) and IRA: There are annual contribution limits for 401K and IRA accounts.

3. Tax Advantages:

  • IUL: The cash value grows deferred, and loans are generally not taxable. The tax status doesn’t change unless the policy lapses or is surrendered with an outstanding loan.
  • 401(k) and IRA: Contributions are tax-deductible, and investments grow tax-deferred, but withdrawals in retirement are subject to income tax.

4. Longevity:

  • IUL: Is a permanent life insurance policy, it lasts your entire lifetime, as long as premiums are paid.
  • 401(k) and IRA: Accounts do not offer any life insurance component and can be depleted if withdrawals exceed the growth of the investments.
Diversity & Inclusion

Strategies, Risks, & Benefits.


  • Definition: Employer-sponsored retirement plan that allows employees to contribute a portion of their earnings before taxes. Employers may match contributions up to a certain percentage.
  • Taxation: Contributions are tax-deductible, and the investments grow tax-deferred. Taxes are paid upon withdrawal in retirement.
  • Investment Options: Limited to the options provided by the employer’s plan, which usually includes a range of mutual funds, stocks, bonds, etc.
  • Wealth Accumulation: Depends on the market performance of the investments chosen.
  • Risks: Subject to market risk. The value of your 401(k) can go down if the market performs poorly.

IRA (Individual Retirement Account):

  • Definition: Retirement account that allows individuals to contribute pre-tax (Traditional IRA) or after-tax (Roth IRA) money.
  • Taxation: Traditional IRAs allow for tax-deductible contributions and taxes are paid upon withdrawal. Roth IRAs are funded with after-tax dollars but withdrawals in retirement are tax-free.
  • Investment Options: Broader than a 401(k). Can include stocks, bonds, mutual funds, ETFs, etc.
  • Wealth Accumulation: Depends on the market performance of the investments chosen.
  • Risks: Subject to market risk. The value of your IRA can go down if the market performs poorly.

Hybrid Arbitrage Index Universal Life (IUL) Insurance:

  • Definition: A type of permanent life insurance that provides a death benefit and a cash value component that can be invested.
  • Taxation: Premiums are paid with after-tax dollars. The cash value grows deferred, but loans from the cash value are tax-free.
  • Investment Options: The cash value can be invested in index accounts that are linked to a stock market index, usually the S&P 500.
  • Wealth Accumulation: The cash value has the potential to grow based on the performance of the index, but it also has a guaranteed minimum interest rate (e.g., 0% floor) which means the cash value won’t decrease even if the index performs poorly.
  • Access: Because this policy has no surrender charges the cash value can be borrowed at any time without tax and used to pay debt early or cancel interest.
  • Risks: Lower risk compared to 401(k) and IRAs because of the guaranteed minimum interest rate. Because there are no caps on the return you can earn maximum rates or returns are linked to a stock market index, usually the S&P 500.
Go debt Free

Bank Like a Bank Comparison:

  • Risk: The IUL has the least risk among the three due to the guaranteed minimum interest rate (floor). 401(k) and IRAs carry market risk, which means they can lose value if the market performs poorly.
  • Taxation: 401(k) and Traditional IRA allow for tax-deductible contributions, while IUL and Roth IRA do not. However, IUL and Roth IRA allow for tax-free withdrawals up to a certain amount, while 401(k) and Traditional IRA do not.
  • Utilization: Money in a 401K or an IRA cannot be accessed early without penalties. With liquid IUL the cash value can be accessed and used to pay debt early, canceling interest.
  • Investment Options: IRAs offer the most investment options, followed by 401(k)s. IULs have limited investment options, usually linked to a stock market index.
  • Wealth Accumulation: While the IUL offers a guaranteed minimum interest rate, it also usually has a cap on the maximum return, but in the case of Hybrid Arbitrage there are no caps on the IUL, which means there is no limit to wealth accumulation in years when the stock market performs exceptionally well. 401(k)s and IRAs do not have a cap on returns, but also do not have a guaranteed minimum interest rate.
Financial Wellness

Bank Like a Bank Solution

  1. Accelerated Debt Payment: The technology acts like a GPS, directing funds in the most efficient way to pay off debts earlier than the standard term. It can reduce the interest paid and help users to become debt-free more quickly. This is akin to the snowball or avalanche methods of paying off debt, but it’s driven by AI and algorithms. The technology integrates with the IUL, enhancing the policy’s characteristics based on the changes of the IRS codes 7702 and 101a in the Cares Act 2020.
  2. Using Index Universal Life Insurance (IUL) for Banking Purposes: This is an advanced financial strategy that goes much further than the “Infinite Banking Concept” or “Bank on Yourself.” With an IUL, there’s potential to earn tax free interest based on index market performance without the risk of losing principal. Furthermore, policyholders can borrow against their IUL cash value, effectively “banking” with their policy. The idea is that instead of paying interest to a bank, lender or even the life insurance company, they’re not paying back the loan, the owner can pay off debt in record time, overfunding the IUL with the policy owner’s liabilities and theoretically earning the interest on themselves.


  1. Tax Advantages: One of the key benefits of an IUL is its tax-advantaged growth. Earnings within this policy are not taxable. Furthermore, loans against the policy typically aren’t considered taxable income.

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