Overfunding
In an IUL or other permanent life insurance policy, funding the policy with the maximum allowed premium while maintaining the minimum required death benefit, in order to maximize cash value accumulation.
Understanding Overfunding
Overfunding an IUL (to just below MEC limits) is a common strategy to maximize the cash value accumulation available for tax-free policy loans in retirement. An overfunded IUL has a higher cash value relative to the death benefit compared to a standard policy. This must be done carefully to avoid crossing into MEC territory, which would change the tax treatment of distributions.
Why This Matters for Retirement: Understanding Overfunding is essential for making informed decisions about tax-free retirement income strategies. Whether you are evaluating an IUL policy, planning Roth conversions, or comparing retirement vehicles, this concept directly affects your outcomes.