Are you a highly-paid medical professional attempting to create enough wealth to live a comfortable and exciting life when you finally decide to retire?
Have you experienced challenges with traditional retirement planning products like contribution limits and Required Minimum Distributions? How about the tax liability on your retirement income? Is that going to diminish your available income in your 70s, 80s, and 90s?
If you are like most other neurologists, you’re probably looking for that one investment product that doesn’t contain all the rules and constraints that the traditional products contain. An IUL could very possibly be that product you’re searching for.
How can I do better with an IUL?
The problems or drawbacks found in traditional retirement products simply are not found in an indexed universal life insurance policy (IUL). In addition to the supplemental tax free income that an IUL can provide the IUL offers a tax-free death benefit for your surviving loved ones that is guaranteed for a lifetime.
Certainly, the 401(k) is one of the better “gifts” provided by the IRS because your contributions are tax-deductible and in many cases, the employer will match those contributions up to the limit they and the IRS are comfortable with. The problem is the restraints that are placed on your retirement plan:
- Annual contribution limits ($20,500 in 2022)
- Early withdrawals (before age 59 ½) are usually taxed as income and a penalty of 10% is charged (there are a few exceptions)
- You must begin taking required minimum distributions (taxable) after reaching age 72. This includes all employer-sponsored plans, traditional individual retirement plans (excludes IUL and Roth IRA)
- Creating a huge tax liability when money is withdrawn
The IUL does not contain any of the above-mentioned constraints and more importantly, your income stream (using policy loans) is tax-free. Simply put, it’s a loan (you don’t have to repay), not income.
How Does an IUL Work?
Let’s put first things first.
Indexed Universal Life insurance (IUL) is permanent life insurance that is specifically designed to function as a retirement planning asset.
When the policy is structured properly, the living benefits of an IUL are significantly enhanced which allows the policyholder to focus on the living benefit (wealth accumulation) primarily while the death benefit is secondary.
Yes, there are other life insurance products that can be used in retirement planning, however, we have found over time that IUL works the best.
IULs are flexible!
You can skip premiums and then catch up later and you can change the death benefit to accommodate your circumstances.
We have found that having flexibility in retirement planning as one of the top 5 reasons our clients choose the IUL over other investment products.
Here is a macro-view of what happens in your IUL:
- Your policy is set up by an independent advisor based on your goals and available contributions (premium payments).
- You send your premium payment to the insurance carrier and it is deposited into the policy’s cash account.
- Policy charges are deducted from the cash account and the remainder is invested into various indices like the S&P 500 or NASDAQ 100 (you have many to choose from).
- At the end of the reporting period, the gains in your index accounts are added to the policy’s cash value account. Rinse and repeat.
It’s important to note that the index earnings in your account are collared by a “cap” and a “floor.”
The cap represents the maximum you can earn on an index account but the floor represents the minimum you can earn.
The “floor” is what prevents your account from losing value because the floor is never less than zero.
In other words, you can earn like you are “in the market” without actually being “in the market” since your cash is not invested in the stock market.
For example, if you invest $100,000 directly in the S&P 500, your value would decline when the S&P 500 underperforms or experience losses. If that same $100,000 was contributed to an IUL into the S&P 500 (with a 12% cap and a 0% floor), you would earn significantly more since your cash account would not be impacted by the losses.
Finally, when the time comes that you want to start receiving an income stream from your IUL, you simply pull tax-free policy loans from your cash account and never repay them.
The loans will be repaid by being deducted from your policy’s death benefit when you pass away with the balance going to your beneficiary. It’s especially important to note that you can withdraw funds from your IUL tax-free anytime you choose.
Is an IUL a Good Product to Use for a LIRP?
Yes and here’s why. A LIRP is an acronym for Life Insurance Retirement Plan. A LIRP, as opposed to traditional retirement vehicles like a 401(k and IRA do not have the same IRS regulations that can limit your annual contributions and expose you to tax liability when the time comes to withdraw the wealth you’ve accumulated over time. Historically, the LIRP has been made up of other cash value life insurance like whole life, variable universal life, and fixed universal life. Over time, however, we have discovered that a properly structured indexed universal life policy (IUL) will outperform all other types of cash value life insurance products.
Having a LIRP puts you in a better position since your IUL will contain living benefits like an accelerated death benefit that offers instant access to a large portion of your death benefit if you are diagnosed with a chronic, critical, or terminal illness.
The accelerated death benefit is also a solid alternative for stand-alone long term care insurance which in today’s market can be very expensive. Additionally, your IUL contains a guaranteed tax-free death benefit that your surviving loved ones can depend on when the worst thing happens.
We understand the challenges that medical professionals like neurologists must deal with if their retirement planning only includes traditional retirement products and for this reason, we encourage IUL for neurologists from a top IUL carrier as part of their retirement planning.