Why doctors love Indexed Universal Life Insurance as a retirement vehicle?

May 4, 2018

There are many traditional ways of saving money for retirement such as a 401(k) tax-deferred plan, a traditional Individual Retirement Account (IRA) and a Roth IRA. Each one has it's purpose, limitations and benefits.

 

401(k) and IRA's can be a great way to defer taxes until a later time. There are many people that think they won't have to pay taxes on these types of plans if they don't access the money until they retire. Sadly, that is far from the truth. If you don't access the money until age 59 1/2 you will avoid 10% federal penalty tax but you will still have to pay the federal and state taxes. 

 

 

A Roth IRA is free of taxes on earnings after the age of 59 1/2 but if you access the earnings before the age of 59 1/2 you will pay taxes and a 10% federal penalty tax. Contributions can be accessed before the age of 59 1/2 tax-free. The tax advantages on a Roth IRA may be appealing but this type of account may be the best type a retirement savings for a doctor since it has certain limitations.

 

Contribution Limits

 

  • You can contribute a max of $5,500 per year if you're under age 50

  • You can contribute a max of $6,500 per year if you're age 50 or older

 

Income Limits

  • If you're single and your income is $135,000 or more you don't qualify for a Roth IRA

  • If you're married filing jointly and your income is $199,000 or more you don't qualify for a Roth IRA

  • If you're married filing separately and your income is more than $10,000 you don't qualify for a Roth IRA

Most doctors earn more than the income limitations and want to save more than the contribution limits of a Roth IRA.

 

 

Why doctors love Indexed Universal Life Insurance as a retirement vehicle?

 

Since most doctors earn a significant income and are prone to lawsuits, using an Indexed Universal Life Insurance policy as a retirement vehicle can be a great benefit for several reasons. 

 

Protection from lawsuits 

 

In most states (not all, please check your home state), Indexed Universal Life protects your cash value from bankruptcy, lawsuits, creditors, leins and other judgements. Sure, malpractice insurance may protect you from a lawsuit but this type of policy has limitations. There is an "individual limit", usually $1,000,000, which is the most that will be paid for any one claim and an "aggregate limit", usually $3,000,000, which is the most that will be paid in any policy year for all claims. 

 

If you are sued for more than the malpractice policy limit, you can be liable to pay the suing party the cash amount over that limit. Unfortunately, 401(k) plans and all types of IRAs are not protected from lawsuits. That means you can be ordered to pay from your cash accounts, retirement accounts, stocks, mutual funds and other investments.

 

Since life insurance is technically not considered an investment, even though it has a cash value, it is considered a life insurance policy. Therefore, the cash value is protected against lawsuits.

 

 

 

 

 

No contribution or income limits

You can contribute as much as you like per year within the policy guidelines and there is no limit on your annual income.

 

No distribution or age limits

The cash value in IUL policies can be accessed at any time without penalty, regardless of your age.

 

Tax-deferred growth

The cash value in the policy grows tax-deferred but can be accessed tax-free. (see tax-free access to cash accumulation)

 

Tax-free access to cash accumulation

The cash value within an IUL grows without being taxed. If you were to withdraw the cash value or cancel the policy then the gains (the amount above the total premiums paid) realized within the policy will be taxed as income.

 

There is something called a Policy Loan Provision which insurance companies created to allow you to access the cash value within the policy tax-free. Since loans are not taxed, it's an ingenious way to access the cash value inside your policy without paying taxes on it. It is considered a loan against the cash value (not from the cash value) by the company, not a withdrawal. There is a 0% loan interest rate.

 

 

Death benefit

In a traditional retirement plan, if you were to pass away the money in your account would be taxed as income before it goes to your beneficiaries. There is no death benefit on traditional retirement plan. In an IUL, your beneficiaries would receive all of the death benefit tax-free. 

 

 

Guaranteed minimum interest (floor)

IUL policies protect your account value against market loss with a minimum guaranteed floor of 0%. This means that you will never receive less than 0% interest even when the market falls below zero. Some companies have minimum floor as high as 0.75%. In a traditional market investment there is no floor to protect your account value.


Upside growth potential (cap)

IUL policies have a capped interest rate set by the insurance company, usually around 10%-15% depending on the company. When your money is in traditional market investments there is the possibility of earning a high interest rate but you also have the risk of losing most, if not all of your investment. With an IUL you trade the high potential interest gains for a capped interest rate.