Seed vs Harvest Strategy

Understanding the SEED Phase

The Seed Phase is your wealth accumulation period—the years when you're working, earning income, and maximizing contributions to build substantial tax-free cash value for retirement.

What Happens During Seeding

Premium Contributions: You contribute the maximum amount allowed by IRS rules without triggering Modified Endowment Contract (MEC) status. For most people, this ranges from $12,000 to $200,000+ annually, depending on age, health, and death benefit design.

Cash Value Growth: Your premiums are allocated to your chosen index strategies (S&P 500, Nasdaq, blended indexes, etc.). Each year, you receive credited interest based on index performance—ranging from 0% (in down years) to your cap rate (typically 10-14% in strong years).

Tax-Deferred Accumulation: Unlike taxable brokerage accounts where you pay taxes annually on dividends and gains, your IUL cash value grows completely tax-deferred. You pay zero taxes on growth during the accumulation phase.

Compound Growth: The longer you remain in seed phase, the more powerful compound growth becomes. Money that has been growing for 15-20 years creates exponentially larger results than recent contributions.

Optimal Seeding Strategies

• Start young: Begin seeding in your 30s or 40s for maximum compound growth time
• Maximize contributions: Contribute as much as IRS limits allow—the more you seed, the more you harvest
• Stay consistent: Regular annual contributions (even during market downturns) maximize dollar-cost averaging benefits
• Avoid early loans: Resist taking loans during accumulation years—let cash value compound undisturbed
• Diversify index allocations: Spread across multiple index strategies for balanced growth
• Monitor annually: Review policy statements to ensure proper funding and growth trajectory

How Long Should You Seed?

The ideal seeding period is typically 15-25 years, though this varies by individual circumstances:

• Minimum: 10-15 years – Adequate for modest retirement supplementation
• Ideal: 15-20 years – Strong balance between accumulation time and retirement income
• Optimal: 20-25+ years – Maximum compound growth creates largest tax-free income streams
• Extended: 25-30 years – For those starting young (age 30-35), extended seeding creates generational wealth

Understanding the HARVEST Phase

The Harvest Phase is your retirement income period—the years when you stop (or reduce) premium contributions and begin taking tax-free policy loans to fund your lifestyle, travel, healthcare, and other retirement expenses.

What Happens During Harvest

Tax-Free Policy Loans: You borrow against your cash value as collateral. These loans are NOT considered taxable income by the IRS, so you pay zero income taxes on the money you access.

Continued Growth: Your full cash value remains in the policy and continues earning credited interest—even the portion you've borrowed against. This is the "magic" of policy loans: your money keeps working while you're using it.

No Required Repayment: Unlike traditional loans, you're never required to repay policy loans during your lifetime. The loans are simply deducted from the death benefit when you pass away.

Flexible Distributions: Unlike Required Minimum Distributions (RMDs) from 401(k)s/IRAs, you control how much you take each year. Take more in years with higher expenses, less in years you don't need it.

How to Harvest Strategically

• Start gradually: Begin with smaller loans in early retirement, increasing as needed
• Monitor policy performance: Ensure loan amounts don't exceed safe withdrawal rates (typically 4-6% of cash value annually)
• Coordinate with other income: Use IUL to supplement Social Security, pensions, or part-time income
• Avoid over-harvesting: Taking excessive loans can jeopardize policy longevity—work with advisor to determine sustainable amounts
• Consider loan repayment: In years with extra income, consider partial loan repayment to extend policy life
• Plan for longevity: Structure harvest to last 25-30+ years to age 90-95

How Much Can You Harvest?

Sustainable harvest rates typically range from 4-6% of cash value annually, depending on your age, policy performance, and desired legacy:

• Conservative (3-4%): Maximum policy longevity, large death benefit for heirs
• Moderate (4-5%): Balanced income and legacy, policy lasts to age 90-100
• Aggressive (5-6%): Higher income, smaller legacy, policy lasts to age 85-90
• Maximum (6-7%+): Highest income, minimal legacy, policy may deplete in late 80s

How Seed-Harvest Compares to Other Retirement Strategies

401(k)/Traditional IRA Approach

Accumulation (Seed):

• Pre-tax contributions reduce current taxes
• Tax-deferred growth
• Subject to market losses (no 0% floor)
• Contribution limits ($23,000 in 2024)

Distribution (Harvest):

• All withdrawals taxed as ordinary income (24-40%)
• Required Minimum Distributions (RMDs) force taxable income
• 10% penalty if accessed before age 59½
• Triggers Medicare IRMAA surcharges
• Can cause Social Security taxation

IUL Advantages: Tax-free harvest (vs. taxed), no RMDs, access at any age without penalty, no contribution limits during seed phase.

Roth IRA Approach

Accumulation (Seed):

• After-tax contributions (similar to IUL)
• Tax-free growth
• Contribution limits only $7,000-$8,000/year
• Income limits exclude high earners

Distribution (Harvest):

• Tax-free withdrawals (similar to IUL loans)
• No RMDs (similar to IUL)
• Must wait until 59½ for tax-free earnings
• Much smaller accumulation due to low contribution limits

IUL Advantages: Unlimited contributions during seed phase ($50K-$200K+/year vs. $7K-$8K), tax-free access at any age, 0% floor protection, death benefit multiplier for heirs.

Taxable Brokerage Approach

Accumulation (Seed):

• No contribution limits (similar to IUL)
• Pay annual taxes on dividends and capital gains
• Taxes drag on compound growth (typically 1-2%/year)
• Full market exposure (can lose 30-50% in crashes)

Distribution (Harvest):

• Capital gains taxes on withdrawals (0-23.8%)
• State taxes on gains
• Net Investment Income Tax (3.8% for high earners)
• No protection from Required Minimum Distributions

IUL Advantages: Tax-free growth during seed (vs. annual taxation), tax-free harvest (vs. capital gains), 0% floor protection, no contribution limits with tax advantages.

Common Seed-Harvest Mistakes to Avoid

❌ Mistake #1: Harvesting Too Early

The Problem: Taking policy loans in years 5-10 before sufficient cash value has accumulated.

The Solution: Resist temptation to access cash value early. Let it compound for at least 15 years before taking loans. Early loans dramatically reduce your eventual harvest capacity.

Example Impact: A $50,000 loan at year 7 could reduce your retirement income by $20,000-$30,000 annually at age 65 due to lost compound growth.

❌ Mistake #2: Under-Funding During Seed Phase

The Problem: Contributing minimum premiums instead of maximum allowed amounts.

The Solution: Maximize contributions during working years. The difference between $25,000 and $50,000 annual premium isn't just 2x—it's exponentially larger harvest due to compound growth.

Example Impact: $25K/year vs. $50K/year over 20 years (7% growth): $1.03M vs. $2.05M cash value—literally double the retirement income capacity.

❌ Mistake #3: Over-Harvesting in Retirement

The Problem: Taking unsustainable loan amounts (7-10%+ of cash value annually).

The Solution: Work with advisor to model sustainable harvest rates (typically 4-6%). Taking too much too fast can cause policy lapse in your 80s.

Example Impact: Taking 8% annually might work for 15 years but cause policy failure at age 80-85, leaving you without income when you need it most.

❌ Mistake #4: Ignoring Annual Reviews

The Problem: Setting it and forgetting it—not monitoring policy performance annually.

The Solution: Review policy statements annually during seed phase, quarterly during harvest. Adjust strategies based on crediting rates, loan balances, and projected policy longevity.

Example Impact: A policy heading toward trouble at age 75 can be corrected with minor adjustments. Ignoring warning signs until age 80 may be too late.

❌ Mistake #5: Not Coordinating with Other Retirement Income

The Problem: Using IUL as only retirement income source or not strategically layering with Social Security, 401(k), etc.

The Solution: Use IUL to supplement (not replace) other income sources. Strategic coordination maximizes after-tax spending power and minimizes Medicare IRMAA surcharges.

Example Impact: Taking $150K from 401(k) triggers 32% tax bracket. Taking $75K from 401(k) + $75K tax-free from IUL keeps you in 22% bracket—saving $15,000-$20,000 annually in taxes.

Advanced Seed-Harvest Strategies

Strategy #1: The "Early Harvest" Exception

While we generally recommend 15-20 years of seeding, there are scenarios where earlier harvest makes sense:

• Early retirement (age 50-55): If you retire early with substantial cash value, strategic small loans can supplement income until Social Security begins
• Bridge income: Use IUL to bridge gap between early retirement and pension/Social Security starting
• Major life event: Medical emergency, education expenses, or business opportunity—better than credit cards or home equity

Key principle: Early harvest is acceptable when alternative is worse (debt, penalties, or losing opportunity). But avoid habitual early harvesting.

Strategy #2: Variable Harvest Amounts

Don't take the same amount every year. Adjust harvest based on needs and circumstances:

• Travel years (age 65-75): Take larger loans for active retirement activities
• Home years (age 75-85): Reduce loans as lifestyle becomes less expensive
• Healthcare years (age 85+): Increase loans if needed for medical expenses or long-term care
• Market performance: Take less in years when policy credits 0-2%, more in years with 10-12% credits

Strategy #3: Loan Repayment for Legacy

If leaving a large inheritance is important, consider occasional loan repayment:

• Windfall income: Bonus, inheritance, or business sale—pay down policy loans
• Reduced expenses: Empty nest, paid off mortgage—redirect savings to loan repayment
• Part-time work: Use retirement job income to pay down loans while maintaining lifestyle from policy

Impact: Repaying $100,000 in loans could increase death benefit by $150,000-$200,000 due to continued cash value growth.

Strategy #4: Multiple Policies for Staged Harvest

High-income earners often use multiple policies with different harvest timelines:

• Policy #1: Start age 35, begin harvest at age 55 (20-year seed) for early retirement
• Policy #2: Start age 40, begin harvest at age 65 (25-year seed) for primary retirement income
• Policy #3: Start age 45, begin harvest at age 75+ (30-year seed) for late-life expenses and legacy

Advantage: Staged harvest creates "income laddering" that provides flexibility and longevity.