Like most medical professionals, dermatologists frequently face challenges with retirement planning because of the restraints placed on traditional retirement vehicles by the IRS.
Whether medical professionals are contributing to a 401k or IRA the annual limit on contributions will likely have a negative impact on reaching the financial goals needed to live the lifestyle you are planning on when you finally retire and stop practicing medicine.
Knowing this, would it be important to you to find a tax-deferred investment product with no contribution limits that will allow you to accumulate the funds needed for you to meet your retirement lifestyle expectations? Here’ we’ll discuss IUL for dermatologists and whether the IUL will be a good fit for your retirement plan.
What is Indexed Universal Life (IUL)?
Indexed Universal Life insurance is like Universal Life insurance on steroids. It has all the benefits of a traditional universal life policy, but there are additional benefits that make it more of a cash accumulation vehicle rather than just life insurance with benefits.
Like universal life insurance, an IUL is flexible when it comes to premium payments and the death benefit. This flexibility helps the policyholder to address life events that happen to most everybody. Our lives aren’t static so neither should our insurance be static.
Examples when flexibility is essential:
CASH FLOW PROBLEMS
Although this is unlikely to affect a lot of policyholders, it’s nice to know that you can skip a few payments if cash is tight or pay less for a few months. We build your IUL around your goals. Premiums during retirement are not even needed.
REDUCED NEED FOR LIFE INSURANCE
Our need for a life insurance death benefit typically goes down as we get closer to retirement. A UL or IUL policyholder can reduce their death benefit if they need less coverage later in life.
INCREASED NEED FOR LIFE INSURANCE
Some life events can trigger a need for more life insurance. In these cases, you can increase your death benefit if medically qualified.
Traditional universal life insurance earns interest on a fixed basis that is specified by the insurer whereas Indexed Universal Life insurance earns interest based on the indexes your cash value is invested in.
How is an IUL Policy a Better Investment for Dermatologists?
Since the IUL allows the policyholder to invest the cash value in the policy in various indexes like the NASDAQ or S&P 500, the policyholder is given the opportunity to earn market-based returns without actually investing in the market. Plus, there is no contribution limit from the IRS. There are almost a dozen funds that you can allocate money to and you have the ability to make changes when needed.
There are a couple of other components in the IUL that make it a great investment product, commonly referred to as a “floor” and a “cap.” The “cap” is a ceiling on the amount your policy will be credited at the end of the reporting period. For example, if your index performance is 14%, but your “cap” rate is 12%, your cash account would earn 12% rather than 14%.
The good news, however, is the “floor” that is established by the company. The “floor” rate is the minimum amount of interest your cash account will be credited at the end of the reporting period. For example, if your index performance is 0% but your “floor” rate is 1%, your cash account would be credited the 1% rate rather than the 0% rate. This “floor” makes certain that your policy’s cash value will never suffer a loss because of market volatility.
On a side note, most IUL policies have built in bonus interest rates. A good example of this is the guaranteed 1% bonus on the North American Builder Plus IUL. After the 10th year there the policy credits an additional 1% to the policy. This interest rate bonus is in addition to the regular interest that your policy earns.
Are There Downsides to Consider?
It’s safe to say that no life insurance product is without a few downsides, especially if you purchase a product that doesn’t respond to your individual circumstances. When you do some online research about IUL insurance, you’ll likely find as many naysayers as you will raving fans. This is typical because most people writing the articles represent investment products that compete with IUL. Here’s a list of concerns from financial experts found online:
- Dividends not credited – The IUL will not consider dividends as part of the crediting to your policy.
- Policy Costs – There are two kinds of expense costs associated with every IUL: Fixed Expenses and Variable Expenses:
- Fixed expenses include the Premium Load and Administrative Fees (usually only for the first 10 years)
- Variable expenses include the Expense Charge (cost to issue the policy and pay the agent), Mortality Charges (actual cost of the death benefit), and Surrender Charges that apply if you surrender your policy early.
IUL is a long-term play. The most expensive period is the first few years of the policy. Long-term, the expenses tend to be much less than alternative retirement planning options like a SEP, 401k, ROTH IRA or IRA.
What’s very important to note here is that policy costs vary from company to company and as an independent agency we can steer you toward the best IUL companies for starting a LIRP.
Is an IUL considered to be a LIRP?
Simply put, a LIRP is an acronym used for Life Insurance Retirement Plan and there are several life insurance products that fall under the LIRP umbrella. A LIRP can be used by medical professionals like dermatologists when they come to the realization that traditional retirement products are not going to deliver their desired results for wealth protection and accumulation and retirement planning goals.
Over the years we have seen medical professionals take advantage of tax-deferred accumulation products such as whole life or variable whole life insurance and traditional universal life insurance. It is our recommendation that Indexed Universal Life Insurance (IUL) may be the better tool when purchased from a company that has historically delivered higher returns but charges minimal expenses. When structured properly, the IUL will maximize cash accumulation and thereby deliver a significant income stream for retirement.
We certainly do not consider Indexed Universal Life insurance to be a cookie-cutter solution for retirement planning. There are, however, tools available that will enable us to illustrate tax-free income projections which will enable our clients to make an informed decision as to whether this insurance-investment product will be a good fit in your retirement planning portfolio. We can run an IUL calculator for you to compare against your current retirement planning options.
Your Bottom Line
What your efforts will boil down to is whether or not you will have the cash you need to live a lifestyle you expect and planned for in your retirement years. When the time comes, your IUL will have accumulated enough cash over the years to provide you a tax-free income by using policy loans as an income stream. If the worst should happen while you’re working or in retirement, there will also be a tax-free death benefit for your surviving loved ones.