Indexed Universal Life Insurance (IUL) is just one of many vehicles that are used in a comprehensive retirement plan. Yes, the IUL product is a life insurance product, but most of our physician clients who purchase an IUL, do so for retirement planning. Here, we’ll consider IUL for Cardiologists.
We find in many cases that Cardiologists, who are high-income professionals, can easily max out typical investment options such as the 401k and IRA and are continually searching for an alternative investment product that will enable them to live a lifestyle they are accustomed to after they retire.
Indexed Universal Life Insurance has become a popular alternative to traditional retirement vehicles for various reasons. Since traditional cardiology pays about $300,000 per year and invasive cardiology pays over $500,000 per year, it’s not unusual that these professionals must deal with the restraints placed on typical investment products and become concerned about their tax liability in retirement.
In this article, we’ll discuss how high-earning professionals can use Indexed Universal Life insurance, sometimes referred to as a LIRP (Life Insurance Retirement Plan) as an alternative investment product for consumers who want to take advantage of market gains without the losses.
Why Cardiologists Should Consider Indexed Universal Life Insurance
The IUL is a favorable investment option for high-income professionals who are want to invest money into a tax-deferred investment vehicle after they have maxed out other retirement accounts such as an IRA or 401k. The IUL is also a beneficial alternative for consumers who may not qualify for a Roth IRA.
Here’s How it Works
First of all, an Indexed Universal Life Insurance policy combines a life insurance death benefit with an investment component. When you pay a premium payment, a portion of the payment is used to cover the cost of your life insurance and any fees associated with the policy, The remainder of the premium is then placed in or added to the cash value account.
The cash in the cash value account is credited with interest that is based on the performance of the equity index or indexes that you have selected. It’s important to note that the cash is not invested in the stock market but instead in indexes like the S&P500. Most IULs offer a guaranteed fixed interest rate and a choice of indexes which can be allocated by a percentage of the cash value the policyholder chooses.
At the beginning of the reporting period (typically annual), the value of each index is recorded and then compared to the index value at the end of the reporting period (the crediting period could be monthly, annually, or even as long as 5 years depending on the company). The difference from the beginning to the end of the period represents the performance of the index.
Three Important Numbers
IULs can differ from company to company which can affect the following important numbers:
- Cap Rate: The Cap Rate in your IUL is the percent of the index gain that the insurer is willing to credit to your account. For example, if your Cap is 9% and your index earns 13%, the most you can earn is 9% for the reporting period.
- Floor Rate: The Floor rate is the least amount your account will earn. For example, if your Floor is 2% and the index has 0% earnings, your account will be credited the Floor rate of 2%.
- Participation Rate: The Participation rate is set by the company and is typically anywhere between 25% to 100% or more. This rate represents the percentage of the earnings that will be added to your cash account.
IUL Pros and Cons for Cardiologists to Consider
All life insurance policies and investment products have advantages and disadvantages based on the needs of the policyholder. Advantages will enhance the solution to your investment needs and disadvantages will typically be a hindrance.
- Enhanced cash accumulation – The earnings in your cash account grow tax-deferred.
- Policy Flexibility – Similar to traditional Universal Life, the IUL has flexibility when it comes to periodic premiums and death benefit.
- Reduced risk – Since the funds in your cash account are not directly invested in the stock market and there is a Floor rate included in your policy, your cash is not subject to market volatility as it would be if invested directly in the market.
- No Contribution Limits – The IRS does not limit the amount of money you can invest each year into your IUL as it does with other investment products like an IRA or 401k.
- No Required Minimum Distributions – There is no requirement that you begin taking distributions from an IUL like there is with an IRA or 401k. This means that you can begin taking cash through policy loans from you IUL later in life if you prefer.
- Earning Cap – Your IUL will have a maximum interest cap on earnings that is set by the insurance company and some companies set a participation rate that is less than 100%.
- Fees – IUL products typically have higher management and policy fees than other traditional investment products in the earlier years.
Indexed universal life insurance is a long-term play. Fees in your 401k or managed account typically outweigh the fees in an IUL.
You can Convert Your IRA to a ROTH IRA or an IUL
Although converting an IRA to an IUL is not for everybody, if you feel that your investment needs will be better met using Indexed Universal Life Insurance, converting your IRA to an IUL could be a solid strategy. Many investors find over time that their IRA is becoming a tax time bomb. Does it make sense to go ahead and pay the taxes now or stretch the taxes over your lifetime. We can help you analyze this. You may also find that your IRA is not performing as well as anticipated it would and the limit on contributions is not allowing you to build your retirement plan as efficiently as you thought you planned.
In cases like this, we always encourage investors who have doubts about their IRA’s performance to speak with an insurance professional at InsuranceQuotes2Day to determine if converting your IRA to an IUL makes better sense for your investment goals. An IRA to IUL conversion can be a successful strategy as long as you take the appropriate steps when making your conversion and an insurance professional should always be consulted.
The Bottom Line
An Indexed Universal Life Insurance policy is considered by most professionals to be a comprehensive and flexible plan for building a solid retirement income. These plans have become increasingly popular for high-earning professionals such as physicians because an IUL allows investors to enjoy gains in the marketplace with protection from losses. The IUL policy also offers protection for your surviving loved ones through the guaranteed death benefit.