Many people who interact with an anesthesiologist (especially surgical patients) are not aware of how important their service is and that they are paid very well for keeping us asleep or numb during times of physical trauma. Anesthesiology is a specialty that requires considerable training and education. In most cases a candidate for this specialty will begin preparing in High School, then College, and then an additional four years in Medical School to earn their MD.
On top of their education requirements, most anesthesiologists go through four years of residency to obtain real-life experience and many go through an additional one-year fellowship to focus on their desired specialty in the field. The reward, however, is certainly worth it when you consider the average annual compensation is close to $400,000 a year. To be clear, anesthesiologists earn more than most physician specialists.
When you consider investment and retirement vehicles that anesthesiologists have available to them, it’s easy to understand that the restraints that typical retirement planning vehicles contain (401(k), SEP) could easily prevent these high-income individuals from having enough money during their retirement to continue a lifestyle they’ve become accustomed to. In these circumstances, Indexed Universal Life Insurance can provide the tax-deferred income they’ll need at retirement.
What is Indexed Universal Life (IUL)?
The IUL is a life insurance product that is designed for cash accumulation on a tax-deferred basis. It services two purposes that every high-income earner needs because it also provides a death benefit along with the investment component.
This investment product works by taking a portion of the premium to pay for the annual renewable term insurance and associated management fees and then investing the remaining premium into equity index accounts like the NASDAQ or S&P500. Policyholders can determine which indexes they want to invest in and what percentage of the available premium to invest in each account.
The IUL is designed in such a way that policyholders can earn interest based on the market without actually investing in the market. The product is a great solution for high-earning professionals who want the ability to earn market-like gains but do not have the appetite for the risk associated with a volatile marketplace.
Over time, your IUL or LIRP (life insurance retirement plan) will grow and you will be able to take tax-free income to supplement your retirement income.
How Does the IUL Work?
The best way to explain the workings of an IUL is to provide a step by step example in simple terms:
- Since an IUL is an insurance product, the applicant chooses a death benefit that makes sense for their needs. If there is other insurance in force, the applicant may want to choose a very low death benefit so that the majority of the premium available for investment purposes.
- The insurance professional will retrieve quotes from the top indexed universal life insurance companies he or she represents and then offer what they believe is the best solution for your circumstances and financial goals.
- Although there will be a minimum premium established for the policy, most policyholders elect to pay more than the minimum so they can take advantage of cash accumulation component (there is no annual maximum contribution rule set by the IRS)
- The insurance company records the difference in the value of each indexed account from the beginning of the reporting period and at the end of the reporting period (typically on a monthly basis. If there is a gain in the index, that percentage is added to your cash account. If there is no gain or even a loss, no interest is credited to the cash account. Although the index gain or loss is recorded monthly, most insurance companies will credit your cash account on an annual basis.
Can I lose Money if the Indexes do not Perform Favorably?
Your cash account will not lose money if your indexes lose value. One of the most attractive features of the IUL is known as a “floor” rate in your policy. This “floor” rate prevents a negative gain from affecting the value of your cash account. It protects you because the “floor” rate is usually set at 0% or higher. This means if your indexes do not have a gain during the reporting period, your account would be credited the floor rate of 0%. The index goes down but your account remains in tact.
Even if your indexes ended with a loss, your account would still be credited the floor amount.
Is there a Limit on How Much I Can Earn?
Yes, there is. In order to offset the floor rate in your IUL, the insurer will have a “cap” which represents the maximum amount of interest your policy can earn during the reporting period. For example, if your cap rate is 9% but the indexes earn 11%, your cash account would be credited the cap rate of 9%. So then, if your policy has a floor of 2% and a cap of 9%, you are assured that your account would earn between two and nine percent each year. You can earn market like returns without being invested in the market.
Who are the Best Companies for IUL Policies?
There are several factors that we take into consideration when we develop our go-to list of insurance companies that offer Indexed Universal Life Insurance. Without getting too technical, here are the criteria that we consider when we select our top five carriers.
- Ratings – We always consider the annual ratings supplied by the four major rating services to determine their financial strength and their ability to pay the claims that are imminent. A less than favorable rating is an indication that there are financial issues that could be affecting the stability of the insurance company.
- Index Cap Rate – It’s important to find the company with the highest index cap so that your IUL can deliver the most favorable return. However, it’s also important that the company you choose has a history of holding their index cap steady because the companies can reduce the cap if they need to. We feel that a steady cap rate of 12% will deliver sufficient earnings for our clients,
- Policy Expenses – All IUL policies come with various management fees that will affect the net earnings for your IUL. Certainly, the companies we recommend will have the lowest fees available.
- Money Sweep Frequency – Certainly a policyholder wants their earnings posted as soon as possible. Different companies offer different sweep options that range from daily, monthly, quarterly, and annually. We always recommend the daily sweep option if available. Currently, there are two carriers that offer this option; North American and Midland National.
- Loan Options – If your plans are to use your accumulated cash for retirement income, you will use policy loans to access your cash in the policy. The options are typically variable and fixed and we always recommend the variable rate loan because the funds stay in your index accounts and continue to earn interest.
- Policy Interest Bonus – High-earners like anesthesiologists will be pleased to learn that some insurance companies offer an interest bonus to policyholders after the policy has been in force for 10 years. This bonus can equal as much as an additional 1% and can make a substantial difference in the earning power of your IUL.
- Policy Interest Multiplier – This is a unique bonus that is available from a select group of insurance companies. This bonus provides for the insurer to add an additional 10% bonus to your policy based on the growth for that year. Different carriers that offer this bonus offer it in different policy years of which, six being the earliest we’ve found.
- Overloan Protection – If your policy lapses because of outstanding loans, all of your loans will suddenly become taxable events. This costly mistake can be prevented with an overloan protection rider. For this reason, we will only recommend a carrier that makes this rider available.
The insurance companies that we recommend contain all of the criteria listed above. Here are the top five that we recommend:
|Insurance Carrier||A.M. Best Financial Rating|
Who Should Consider Indexed Universal Life Insurance
The IUL is especially popular for professionals like anesthesiologists and other highly-paid medical professionals because most highly-paid professionals have to deal with maximum contributions with traditional investment vehicles offered by employers and when self-employed.
However, even if you are an average income earner, the IUL may be a better fit for you and your family because the contribution restraints that you’ll find in your 401(k) or IRA are not present in an Indexed Universal Life Insurance policy.