Month: October 2024

Posted on

Example: I’m 55! Where Can I Roll Over My IRA | 401K | TSP | For Maximum Monthly Income When I Retire?

Toni Nicholas

Comparing Growth of Annuities, Indexed Universal Life (IULs), and Whole Life Policies After Rolling Over a $100,000 IRA, 401(k), Pension, or TSP Fund Over Ten Years for a 55-Year-Old Woman and a 55-Year-Old Man

When rolling over, say, a $100,000 retirement account, such as an IRA, 401(k), pension, or Thrift Savings Plan (TSP), into an annuity, Indexed Universal Life (IUL) policy, or whole life insurance policy, there are critical differences in how each of these products might grow over the next decade. The performance of these financial products varies based on market conditions, policy fees, and how the products are structured. Additionally, the eventual monthly income they provide after ten years of accumulation is one of the key reasons individuals choose between these options.

In this article, we will explore how these three options would perform for both a 55-year-old woman and a 55-year-old man, evaluating which product would have grown more in value over the past ten years and which would provide the most monthly income in retirement. We will also name specific carriers and products to give you a clear picture of how each product could work.

Understanding the Financial Products:

Before diving into growth projections and income potential, it’s crucial to understand how each of these financial products operates:

1. Annuities: These are contracts with insurance companies where an individual pays a lump sum or makes periodic payments, and in return, the insurer promises either immediate or future income. Annuities can be fixed, indexed, or variable, each offering varying levels of risk and reward.

2. Indexed Universal Life (IUL) Insurance: IUL policies are a type of permanent life insurance offering both a death benefit and cash value growth. The cash value growth is linked to the performance of a market index, such as the S&P 500, but with capped gains and a floor to prevent losses during down markets.

3. Whole Life Insurance: This is another form of permanent life insurance with guaranteed cash value growth. Whole life policies grow based on a guaranteed interest rate and may also pay dividends, depending on the carrier. They are generally safer but offer lower growth potential than market-linked products like IULs and variable annuities.

Evaluating Growth Potential Over Ten Years

To evaluate how these products would have grown in the past ten years, we will look at typical returns and the impact of insurance costs, fees, and other factors.

1. Annuities

Fixed Annuities offer a guaranteed interest rate, which is typically low but safe. Over the last ten years, a fixed annuity with an average interest rate of 2-3% would have grown the $100,000 investment to approximately $121,899 (2% annual growth) or $134,392 (3% annual growth). This growth is consistent for both a 55-year-old woman and a man since annuities are not affected by gender differences in life expectancy at this stage of accumulation.

Variable Annuities, on the other hand, invest in market-linked subaccounts and can achieve higher returns depending on market performance. Given that the stock market has experienced significant growth over the last ten years (despite some volatility), an average annual return of 6-7% is plausible. A 6% annual return would have grown the $100,000 to approximately $179,085 after ten years. However, variable annuities also come with higher fees and risks, including potential losses during market downturns.

Indexed Annuities are tied to the performance of a market index (such as the S&P 500), with a cap on returns and protection against losses. Assuming an average return of 4-6% annually, the $100,000 could have grown to approximately $148,024 (4% annual return) or $179,085 (6% annual return), similar to variable annuities but with less risk.

Carrier and Product Example: One of the top options in the annuities market is Allianz with its Allianz 222 Fixed Indexed Annuity. This product offers growth potential tied to market performance, with a cap on gains and protection against losses, making it a good fit for individuals who want conservative growth without risking their principal.

2. Indexed Universal Life Insurance (IULs)

IULs provide the potential for market-linked growth with downside protection, making them a middle-ground option between whole life insurance and variable annuities. Over the past ten years, with the S&P 500 averaging about 10% annually, an IUL with a cap of 10-12% could have provided a return of approximately 6-8% annually, depending on the policy’s specific cap and floor.

Assuming a 7% annual return, the $100,000 would have grown to approximately $196,715 over ten years. However, it’s important to remember that IULs have fees related to the cost of insurance, which could reduce the overall cash value growth. For a 55-year-old woman, the costs may be slightly lower due to longer life expectancy, resulting in slightly higher cash value accumulation compared to a 55-year-old man. Even so, the difference would be minimal.

Carrier and Product Example: The Nationwide IUL Accumulator II is a well-known product in the IUL space, offering competitive caps on growth and downside protection. This product would have allowed the $100,000 to grow consistently over the last ten years, assuming market conditions remained favorable.

3. Whole Life Insurance

Whole life insurance offers guaranteed growth, typically between 2-4%, along with potential dividends depending on the carrier. Over ten years, a whole life policy with a 3% guaranteed growth rate would have grown the $100,000 to approximately $134,392. If the carrier offered dividends, this could increase the growth slightly to around $146,879, assuming dividends added an extra 1% annually.

Whole life insurance costs are typically higher due to the guaranteed death benefit, but the growth is stable and predictable. Women, who generally live longer than men, might see slightly better cash value accumulation because their life insurance costs are lower. However, the overall difference would still be relatively small over a ten-year period.

Carrier and Product Example: MassMutual Whole Life 10 Pay is one of the top whole life policies available. It offers guaranteed cash value growth and the potential for dividends, making it a solid choice for those seeking long-term security and stability.

Monthly Income After Ten Years

Now, let’s evaluate the monthly income each product could provide after ten years, based on the $100,000 initial investment and how much it has grown.

1. Annuities

Fixed Annuities: After ten years of accumulation, a fixed annuity could be annuitized to provide guaranteed income for life. Assuming a conservative payout rate of 5%, the $134,392 (3% annual growth) could provide approximately $560 per month for life. Both men and women would receive similar payments, though men may receive slightly higher monthly payouts due to shorter life expectancy, but for a shorter period of time.

Variable Annuities: Given the potential higher growth of a variable annuity, which might have grown to $179,085, the monthly income could be higher. At a 5% payout rate, this would provide approximately $746 per month. However, the payments could fluctuate depending on market performance if the annuity is not fixed.

Indexed Annuities: Assuming an indexed annuity grew to $179,085 over ten years, the monthly payout could be similar to that of a variable annuity, around $746 per month, but with less risk of fluctuation due to market volatility. Like with fixed annuities, men might receive slightly higher payments but for a shorter time.

2. Indexed Universal Life Insurance (IULs)

With IULs, cash value can be accessed through policy loans or withdrawals. After ten years of growth, if the $100,000 had grown to $196,715, the policyholder could take out structured loans against the cash value. Using a conservative 5% loan rate, this could provide monthly payments of approximately $820, assuming the policy is structured for income distribution. The IUL’s death benefit would reduce over time as loans are taken, and women may benefit from slightly higher cash value, allowing for slightly larger loans.

3. Whole Life Insurance

Whole life policies can provide income through policy loans as well, though the growth is slower compared to IULs or annuities. If the $100,000 had grown to $146,879 (including dividends), policy loans could provide around $615 per month at a 5% loan rate. Women, with potentially slightly higher cash value, could draw slightly more per month, though the difference would be small.

Which Product Provides the Most Monthly Income After Ten Years?

Variable Annuities or Indexed Annuities would provide the highest monthly income after ten years, especially if the market performed well, offering up to $746 per month.
IULs could offer slightly less income, around $820 per month, but with the added benefit of continued life insurance coverage and flexibility in accessing cash.
Whole Life Insurance offers the least income potential but provides long-term stability and guaranteed cash value.

Conclusion

Over a ten-year period, variable annuities or indexed annuities would likely have provided the most growth and the highest monthly income, offering the potential for payments around $746 per month. IULs, while slightly less aggressive in growth than variable annuities, offer a solid balance between growth and life insurance.

If you want to discuss your options or run some illustrations for you, feel free to schedule a call.

Please know that any insurance policy is not an investment, and, accordingly, should not be purchased as an investment. 

Posted on

Example: I’m 60! Where Can I Put $10,000? | Annuities | IULs | and Whole Life | Oh My!

Toni Nicholas

What’s the Difference between Annuities, IULs or Whole Life Policies & Which One Will Grow Faster?

When considering which financial product—annuities, indexed universal life insurance (IULs), or whole life insurance policies—would have grown more in value after being initially funded with $10,000 over the past five years, it’s important to understand that each product serves different purposes and operates under different mechanics. Additionally, the growth can vary for a 60-year-old woman compared to a 60-year-old man due to factors like life expectancy, policy structure, and risk tolerance.

In this analysis, we will compare how each of these products would have performed over the past five years for both a 60-year-old woman and a 60-year-old man, considering specific product features, typical returns, and named carriers.

Understanding Annuities, IULs, and Whole Life Policies

Before diving into specific products, it’s useful to briefly outline what each of these financial vehicles entails:

Annuities:

Contracts between an individual and an insurance company where the insurer agrees to pay the individual a stream of payments, typically during retirement. Annuities come in different types (fixed, indexed, and variable), each offering varying levels of risk and growth potential.

Indexed Universal Life Insurance (IULs):

A type of permanent life insurance that provides a death benefit along with a cash value component that grows based on the performance of an underlying market index, such as the S&P 500, with a cap on the maximum return and a floor that protects against losses.

Whole Life Insurance:

Another form of permanent life insurance with a guaranteed death benefit and cash value growth. Whole life policies usually offer guaranteed growth rates and the possibility of dividends from the insurance company, though they typically grow at a slower rate compared to riskier investments like IULs or variable annuities.

Example:

Now, let’s compare the performance of these products based on an initial funding of $10,000 for both a 60-year-old woman and a 60-year-old man.

Annuities: Fixed vs. Indexed vs. Variable

Annuities can be broken down into different types:

Fixed Annuities: Provide a guaranteed minimum interest rate. Over the past five years, rates on fixed annuities have ranged from 2-3%. While this option is safe, the growth is modest. For instance, a fixed annuity at 2.5% would have turned $10,000 into about $11,314 over five years, regardless of gender, because annuities are generally unaffected by age or gender differences.

Variable Annuities: These annuities allow for growth tied to subaccounts, similar to mutual funds, but they also involve higher risk. Given the market’s volatility over the past five years, but also significant growth in 2021 and 2023, a well-diversified variable annuity could have returned 6-8% annually. After five years, the $10,000 investment could have grown to approximately $13,383 assuming a 6% return annually. These values would remain consistent between both genders, as variable annuities rely on market performance.

Indexed Annuities: Indexed annuities are linked to a specific index, like the S&P 500, and typically have caps and floors. Over the past five years, an indexed annuity could have averaged returns between 4-6% depending on the caps, market performance, and specific product features with a 0% floor. A $10,000 investment could have grown to approximately $12,760 assuming a 5% average return. Indexed annuities offer protection against market downturns while allowing participation in market gains.

Carrier and Product Recommendation: A well-known indexed annuity product is the Allianz 222 Annuity. This product offers a competitive participation rate tied to an index while protecting the principal from losses in down years. Over the last five years, the Allianz 222 could have yielded around 5-6% annual growth due to its index-linked structure.

Indexed Universal Life Insurance (IULs)

IULs combine life insurance with the potential for cash value growth based on market performance, typically the S&P 500. Unlike annuities, IULs deduct life insurance costs from the premium, which may slightly reduce growth.

However, because IULs provide market-linked growth with caps and floors, they have the potential to outperform fixed annuities. Over the past five years, the S&P 500 has experienced significant growth, though capped returns in an IUL could range from 5-9% annually, depending on the product’s specific structure. Assuming a cap of 8% and a floor of 0%, an IUL could have delivered around 5-7% annual growth, given the market’s performance.

After five years, a deposit of $10,000 in a well-structured IUL could have grown to about $13,383 assuming an average annual return of 6% while factoring in costs associated with the life insurance component.

One significant difference between the woman and the man’s accounts here is that IUL policies often factor in life expectancy when pricing. Women, having longer life expectancies, might see slightly lower life insurance costs, which could marginally enhance cash value growth compared to men. This means that, for the same IUL product, the woman’s cash value might slightly outpace the man’s.

Carrier and Product Recommendation:  The Nationwide IUL Accumulator II is a well-known IUL product, offering competitive caps and flexible index options. It is known for its robust growth potential with capped upside and downside protection, making it a good fit for long-term cash value growth.

Whole Life Insurance

Whole life policies offer guaranteed cash value growth along with dividends, but they tend to be more conservative in their returns compared to IULs or variable annuities. Whole life policies typically offer guaranteed returns between 2-4%, and some policies from mutual companies may offer dividends, potentially pushing total returns to around 5-6%.

Given the guaranteed nature of these products, an initial $10,000 premium deposit would have grown to around $11,041 after five years with a guaranteed 2% return. Adding in potential dividends and Riders, the value might increase, though whole life policies are known more for their stability rather than rapid growth.  (Click the link for more information about growing a Cash Value Life Insurance Policy and using The Infinite Banking Concept, founded by Nelson Nash.)

Women, who generally have longer life expectancies, may benefit from slightly lower insurance costs, leading to marginally better cash value accumulation than men in whole life policies. However, the difference would be minimal.

Carrier and Product Recommendation: MassMutual Whole Life 10 Pay is a popular whole life product offering both guaranteed cash value growth and the potential for dividends. Over the last five years, this policy would have offered stable, conservative growth, although it wouldn’t match the performance of riskier products like IULs or indexed annuities.

Risk vs Reward:

Comparison of Growth for a 60-Year-Old Woman and a 60-Year-Old Man

1.Annuities:
Fixed Annuity (2.5%): $11,314 (no difference between genders)
Variable Annuity (6%): $13,383 (no difference between genders)
Indexed Annuity (5%): $12,760 (no difference between genders)

2. Indexed Universal Life Insurance (IULs):
Woman (6%): $13,383
Man (6%): $13,200 (slightly lower due to higher life insurance costs)

3. Whole Life Insurance (3% guaranteed + 1% dividend):
Woman: $11,602
Man: $11,500

Conclusion: Which Product Would Have Grown More in Value?

1. Variable Annuities and Indexed Universal Life Insurance (IULs)* would have offered the highest growth potential over the past five years due to their market-linked returns.
For both the 60-year-old woman and the 60-year-old man, a variable annuity like Allianz 222 or an IUL such as Nationwide IUL Accumulator II would have yielded the best growth.

2. Indexed Annuities come in slightly lower but still offer strong growth with added protection against market downturns.

3. Whole life insurance, while stable, would have produced the least growth, but it does provide guaranteed returns and is ideal for those seeking long-term, conservative growth with minimal risk.

For both the 60-year-old woman and man, the differences in account growth would be minor. However, due to slightly lower life insurance costs, the woman may see marginally higher returns in the IUL or whole life policy compared to the man. Annuities, on the other hand, would perform equally for both genders.

*Important Note: Please know that those of us in the Insurance Industry are heavily regulated. Please know that any insurance policy is not an investment, and, accordingly, should not be purchased as an investment. 

**Please also know that there are different Insurance Licenses required when selling a Variable Annuity or a Fixed Index Annuity. The key difference between professionals licensed to sell variable annuities and those licensed to sell fixed index annuities (FIAs) lies in the regulatory requirements and the nature of the products they are authorized to sell. Advisors selling variable annuities must hold a securities license (such as a Series 6 or Series 7) because variable annuities involve investments in market-based subaccounts, similar to mutual funds, and carry a higher level of risk due to market fluctuations. These advisors are also regulated by the Financial Industry Regulatory Authority (FINRA) and the Securities and Exchange Commission (SEC).

In contrast, those selling fixed index annuities (FIAs), such as myself, typically only need a state insurance license, as FIAs are considered insurance products rather than securities. FIAs offer returns linked to an index like the S&P 500 but provide protection against market losses, making them a lower-risk product than variable annuities. Consequently, the regulatory oversight for those selling FIAs is generally less stringent than for those selling variable annuities.

Lastly, my carriers include both Allianz as well as Nationwide, but as of the date of this post, I do not offer Variable Annuities. I currently offer FIAs, IULs, and Whole Life products. Feel free to contact me if you have any questions or wish to pursue any one of the products discussed.