Curing Your Financial Ills

Physicians have traditionally relied upon their earning power to take care of their families, accumulate wealth and provide for their retirement, but lately their incomes have been decreasing. This is a result of climbing health care costs, a rising number of patients with declining Medicare reimbursements and higher practice costs.

And if that is not enough, physicians are likely to soon face even more dramatic changes over which they have no control. For example, the Physicians Foundation listed its top concerns for 2013 as:

• The Patient Protection and Affordable Care Act’s implementation and its possible effect of fee schedules.

• The impact on the profession of physicians moving to hospitals and large medical groups in terms of patient care and the cost of services.

• The effect that non-physician decision makers will have on medical judgments.

• The effect that burdening regulations and related paperwork will have on the quality of physician services.

And let’s not forget the effect of the current tax increases on physicians’ incomes starting with the jump to the 39.6% top rate, the 3.8% investment tax, the 6.2% Social Security tax, the 0.9% Medicare tax and the 20% capital gains tax. These changes are aimed at higher income individuals like physicians, and with this additional tax burden it’s going to be even tougher to deal with meeting your personal goals such as:

• Protecting your family and your assets

• Building retirement funds

• Assuring estate liquidity, and

• Leaving a legacy for your family

The good news is that there is a unique financial tool that can help you achieve these goals on a tax-favored basis — that tool is life insurance. Advantages include:

• Access to cash values can benefit you while you are alive.

• Death benefits protect your family from the loss of your income.

• Provides a legacy for family members, while equalizing their inheritances and assuring estate liquidity with protection from the claims of creditors.

Let’s take a closer look at what life insurance can do to help cure your possible financial ills.

Dealing with higher income taxes

With higher income related taxes, it becomes more important than ever to hold onto as much of your hard earned income as possible. In that regard, life insurance offers the following advantages:

• Over time, life insurance provides tax deferred growth on policy cash values. This is because no income tax is due on the growth of cash values.

• Funds may be accessed through policy loans. While these loans may be subject to interest charges and may reduce death benefits, they are generally not taxable.

• There is no premature distribution penalty for amounts taken from a life insurance policy before age 59-and-a-half.

• Cash values are available to provide financial flexibility through withdrawals that are generally not taxed until the amount withdrawn exceeds the total premiums paid.^[1]

• There are no required distributions from a life insurance policy upon reaching age 70-and-a-half.

The bottom line is that life insurance provides financial flexibility on a tax-favored basis. This can be important to you while you are alive for several reasons, such as providing funds to deal with an emergency or a big expense, or to supplement retirement.

Better yet, in many states a life insurance policy’s cash value is protected, in whole or in part, from the claims of creditors. However, you should check with your attorney to learn the rules in your particular state.

Providing family security

Life insurance can be used to protect your family by providing an ongoing source of income to maintain their lifestyle if something tragic happens to you. The special feature that life insurance provides for that purpose that no other financial instrument can match is that all of the money you want your family to receive is immediately available with the payment of your first premium. There is no need to wait years for adequate funds to accumulate. This is true whether you die the day you purchase the policy or 50 years later.

Further, as with cash values, state laws may provide protection for death benefits from the claims of creditors, but you will need to check with your lawyer to know the details.

Leaving an inheritance

With all of the events and situations that can deplete your estate, life insurance is a way of assuring that you will leave an inheritance to those you love. It also provides a way of equalizing their inheritances if your wealth is comprised of assets that are difficult to divide or if you want to leave specific assets to particular family members. If that is the case, give the assets to those you choose and leave the cash death benefit to others so that everyone is treated equally. And remember, if they are so fortunate as to not need the money, you can leave the funds to your favorite charity.

Generating estate liquidity

Ben Franklin is famous for noting that the only two certainties in life are death and taxes. What he might have added is that in America, for the more financially fortunate among us, one leads to the other.

By that I mean if you have more than the federal estate tax exemption ($5.25 million in 2013) your estate is exposed to the estate tax at a rate of 40% on the excess. While there are a number of legitimate planning techniques that may be employed to reduce or eliminate that exposure, they all have two features in common: you have to change how you own or manage your property and you have to make large estate reducing gifts.

The problem with these types of planning is that you have to make changes to your life, and as people get older they do not like change — especially those such as gifting, which make them feel financially vulnerable. The solution to this dilemma is to purchase life insurance in the amount of the potential estate tax liability. This is usually done through an irrevocable life insurance trust to keep the death proceeds out of your gross estate and, thereby, free of estate tax. In any case, the cost of establishing the trust is minimal and the gifts to the trust to cover premiums relatively moderate.

In addition, don’t forget that federal estate taxes are not the only costs associated with your passing. There are final medical expenses, funeral costs, debts and state taxes to be considered. Here again, life insurance is the perfect vehicle for dealing with such obligations, since it is payable immediately when it is needed; no other financial instrument can match that timing. And don’t forget that the death benefit is generally income tax free.

Summary

Life insurance is a tax favored, and depending on state law, creditor protected vehicle for meeting your family obligations that gives you financial flexibility while you are alive to handle the unexpected or large expenses including retirement needs.

Pay attention to your financial health as you do to the well being of your patients by meeting with your professional advisors on the subject of life insurance. You and those depending on you are likely to be financially better for it.

Richard Newman, CPA, PFS, AEP, CAP, is founder of Life Audit Professionals, LLC in Boca Raton, Florida. He can be reached at rnewman@mylifeaudit.com or (561) 948-2421.

^[1] Loans or partial withdrawals can reduce the policy’s cash value and death benefit. They may also increase the possibility of the policy lapsing and may result in tax liability. You should consult with your tax advisor for additional information on the tax treatment of loans or withdrawals.