The Physician’s Guide to Life Insurance Retirement Plans

Saving for retirement looks a bit different when you’re a physician.

Finding a life insurance retirement plan (LIRP) that works for your needs is essential, but who has time to analyze every possible avenue?

LIRPs are designed to help you meet your financial goals for your golden years, keeping you from worrying about how you’ll pay for your preferred lifestyle once you retire.

To get there, it’s necessary to walk through some numbers to learn how much you’ll need to save and how long you have to do it. Your financial advisor has the tools to simplify this part of the job.

In this blog, we’ll help you understand what life insurance retirement plans are, giving you the knowledge to choose one that will help you reach that number before you retire.

What is an LIRP?

LIRPs are permanent policies that accumulate savings over the years. Done strategically, this policy becomes a part of your long-term financial strategy.

LIRPs are often referred to as permanent life insurance plans. (Learn more: The Beginner’s Guide to Permanent Life Insurance for Physicians) They have a standard death benefit provided to a beneficiary at the time of the policyholder’s death.

Through LIRPs, your cash is invested in a tax-advantaged life insurance policy that accumulates wealth through cash value growth. This type of financial vessel is a money saver for physicians who must invest part of their income to prevent it from becoming taxed.

Covering All the Bases of a Retirement Plan With an LIRP

Any retirement plan must include aspects to cover four factors:

• Longevity
• Market volatility
• Inflation
• Cognitive decline

A life insurance retirement plan addresses each of these issues.

Designed to be permanent, the cash value account increases, and the death benefit is passed along tax-free, solving the longevity risk that other financial plans, such as term insurance, don’t provide.

Planning for retirement later in life makes it challenging to utilize the stock market’s highs by outwaiting the lows. Permanent life insurance isn’t connected to the market’s volatility, but it continues to grow and remains accessible even when the stock market performs poorly.

Many people plan for their retirement decades before they’re at that point. For that reason, financial advisors recommend a plan to address inflation. LIRPs act as a hedge against inflation by consistently growing savings and providing a tax-free death benefit to your loved ones.

Finally, LIRPs cover a crucial but often overlooked aspect of retirement: cognitive decline.

Permanent indexed universal life and whole-life plans offer riders to provide long-term care protection and critical illness coverage. The result is a financial planning avenue that leaves your loved ones with the funds they need to survive — or thrive — after you’re gone, tax-free.

How Do You Fund an LIRP?

Because of its favorable tax treatment and cash value growth options, permanent insurance can be an efficient vehicle for retirement savings. This effect is compounded when the policyholder takes advantage of the maximum investment possible.

LIRPs are funded by premiums, just as any life insurance plan is. Part of each premium is placed in a savings account, which becomes the plan’s “cash value.” The money in that account grows, tax-deferred, over time. How quickly it grows depends on the interest rate agreed upon when you take out the policy.

Using Your Cash Value in Retirement

So how does an LIRP, which sounds very similar to a life insurance policy, become a retirement vehicle?

The difference is in how you access the cash value.

There are three ways to maximize your retirement by optimizing the speed at which your savings account’s cash value grows or minimizing the impact of taxes on your income:

Overfunding Your Account

Unlike other retirement plans, like Roth IRAs, there’s no limit on how much you can invest into your LIRP. Without a cap, those with higher incomes — like physicians — can contribute more to the policy, allowing cash value to grow faster.

Borrowing When Necessary

Need a loan? Rather than heading to traditional institutions to borrow funds and pay them back at a hefty interest rate, you can turn to your LIRP’s cash value for your money. Whatever is in your savings account can be withdrawn tax-free as a loan (but not as a normal distribution).

Taking Cash Value Withdrawals

Sometimes, situations arise where you need money quickly, and you don’t want to take it as a loan. Depending on your retirement plan, you may be able to withdraw these funds directly from your cash value account.

These withdrawals are tax-free up to the amount of your principal contributions. Anything that exceeds that amount is subject to income tax.

Getting familiar with your life insurance retirement plan’s inner workings gives you the opportunity to make strategic decisions that may potentially impact your finances in substantial ways.

What Are the Benefits of an LIRP?

To fully reap the benefits of your LIRP, you must first understand what they include, and that there are different types of permanent insurance, each with its own pros and cons.

The first advantage of all permanent life insurance is that it covers the policyholder for their life, unlike term, which is only active for a set period. During that time, premium payments are made into the policy, and the cash value grows according to the type of policy and its parameters.

As mentioned, the policyholder can use the accumulated cash, taking it out as a loan and repaying it or using it without replacing it. The lifetime effectiveness of the LIRP, its cash value growth, and the potential to use the savings as a loan or withdraw them directly are three of the most known advantages.

However, other benefits include:

• Possibility of nearly unlimited savings due to the “no cap” contribution limit
• Investing contributions in a vehicle that builds tax-deferred cash value
• Cash value being accessible at any age, unlike other retirement plans that penalize you for withdrawing your money before a minimum age
• A tax-free death benefit for beneficiaries
• Options for riders to provide long-term care and critical illness planning
• Financial flexibility as you can spend your other retirement income and assets, knowing that you still have a plan for your beneficiaries after you pass
• The potential for higher Social Security benefits when you use your cash value to delay taking Social Security. Every month you wait, the monthly benefits are higher until you die.

Some LIRPs guarantee your investment returns, ensuring you never take a loss over a year. You give up higher gains when they happen with a booming market to obtain stability in the less profitable years. Your financial advisor can help determine if this aligns with your retirement plans.

What Are the Considerations of an LIRP?

Although LIRPs benefit most people, they’re particularly favored by physicians and other high-income achievers because of the no-cap contribution. However, there are downsides you should consider before you make your investments using the wrong plan.

The Downsides of a LIRP

The early years of a life insurance retirement plan may not seem to make sense at first. You’ll see a lot of expenses and administrative fees and not much in the way of cash value gains.

This is normal.

The fees decrease after the first few years, and you should see more growth in your cash value savings account.

If you withdraw money from your cash value and it isn’t paid back before you pass, the funds are deducted from your death benefit before being provided to your beneficiaries.

Physicians face hefty income tax payments each year, making optimizing deductions necessary. LIRPs don’t provide this advantage, so other retirement plans, like a 401(k), are vital for leveraging the power of tax deductions.

Another consideration is the potential to create too much cash value in your LIRP. When this happens, the IRS labels the policy as a Modified Endowment Contract (MEC) and permanently denies tax benefits. This step is in place to ensure no one abuses the permanent life insurance tax advantages.

What Can a LIRP Supplement?

LIRPs are an excellent supplemental retirement vehicle and should not replace employer-sponsored retirement plans. They are intended to supplement your other financial portfolio accounts, including:

• IRAs
• Pensions
• Savings
• 401(k)s

Having other retirement plans in place ensures that the few drawbacks of an LIRP are covered. As discussed, you can’t use your contributions toward your LIRP as a tax deduction, but you can with a 401(k).

The financial advisory services you work with can guide you in choosing investment and insurance products to work toward a tax-free income.

Who Is a Good Candidate For an LIRP?

Physicians maximize their contributions to traditional savings accounts. If your modified adjusted gross income (MAGI) is over the income threshold for a Roth IRA, an LIRP may be the solution. Anyone who wants to grow their income tax-free or include estate planning in their financial strategy can benefit from an LIRP.

However, some factors make you a prime candidate.

Risk tolerance is the first consideration. If you’re looking for immediate returns, the LIRP may not be the financial vehicle to meet those goals. But if you’re willing to make monthly premium payments and wait to see results until the policy is adequately funded, this plan may work for you.

However, the ideal LIRP candidate should have enough disposable income to avoid tapping into the cash value savings account until it has maximized its earnings. The income threshold for an LIRP is usually around $150,000 for individuals and $200,000 for married couples, a number that most physicians meet.

Good candidates for LIRP investments already have a traditional retirement account through their employer or self-employed alternatives to maximize tax deductions and deferrals. They may also have other investments, such as annuities, mutual funds, and brokerage accounts.

Conclusion

Are you an ideal candidate for the benefits of a life insurance retirement plan? The answer depends on your unique situation.

It’s about more than choosing an insurance company to provide life insurance coverage — with an LIRP, your premiums are designed to become a retirement strategy that includes a cash value component.

The financial advisors at OJM Group understand the types of goals and challenges many physicians face. Before you make an investment in your financial future, visit OJM Group to see how they can help you design a strategic retirement plan and start growing your assets as quickly as possible.