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Implants
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Inside Dentistry

April 2008, Volume 4, Issue 4
Published by AEGIS Communications

Universal Life Goes to Work for Dentist

When Robert Yates, DDS, was in his mid-50s, he took a close look at his life insurance and decided that he wanted it to do more than simply provide a death benefit. “I had been paying premiums for term life insurance for years, and I knew my coverage would terminate when I reached age 81 with no cash value,” the Salt Lake City dentist says. “So I exchanged the term policy for universal life, which could build cash value for my retirement.”

FLEXIBILITY, TAX ADVANTAGES
Dr. Yates learned that he could easily make the exchange, with no conversion fee or medical exam, because both plans are through the American Dental Association (ADA) and he was under age 65 at the time of the conversion. He also was attracted to universal life because of the flexibility built into the product. “I can vary the amount I put into the policy each year, depending on how much extra cash I have on hand,” he says.

With his universal life, Dr. Yates can contribute more dollars to the plan than are necessary to pay for the cost of the current year’s insurance protection and administration expenses, and the extra funds earn a tax-deferred return. He can make payments on a set schedule (eg, monthly, quarterly, or annually) or on an ad hoc basis as his situation allows. He even has the option of skipping some deposits as long as the cash value in his plan is sufficient to cover insurance and administrative costs.

The tax-deferred accumulation of earnings in a universal life account is significant. For example, in a 35% federal income tax bracket, a 5.2% tax-deferred return translates to a taxable equivalent 8%. This advantage can be especially attractive to dentists who have maxed out their qualified retirement plan contributions for the year and want to put additional money aside on a tax-deferred basis. Another tax advantage: Proceeds from a universal life policy, including the cash value, are paid to beneficiaries free of federal income tax under current law.

Dr. Yates has had his universal life plan for 16 years now. During that time, the rate of return has varied, depending on market fluctuations. However, he is guaranteed to earn at least 4% on the balance in his account.

“Even if I decide to withdraw some of the cash that’s accumulated for my retirement, I still plan to retain enough to keep the insurance in force,” Dr. Yates says. And, under current tax law, he will be taxed only on the amount withdrawn that exceeds what he has paid into the plan.

ASK AND COMPARE
Dan Donohue, a Plan Specialist at Great-West Life & Annuity Insurance Company, which underwrites and administers the ADA Insurance Plans, explains that universal life policies are not all identical, so it is important to shop carefully and compare several policies before making a decision. He suggests asking the following questions:

  • Is there a guaranteed credited interest rate?
  • What happens to the death benefit as I accumulate or withdraw funds?
  • When can I access my funds?
  • What is the surrender penalty or withdrawal charge?
  • How much are the administration and annual policy fees?
  • What is the actual cost of the life insurance protection?
  • Are there any commissions or loads?
  • What’s the insurance company’s A.M. Best Company’s rating?

Editor’s note: Dr. Yates’ statements were obtained by Great-West Life & Annuity Insurance Company, underwriter and administrator of the ADA Insurance Plans, relative to his coverage under Group Policy #104GUL, and reprinted with permission. For more information, visit www.insurance.ada.org or call 888-463-4545. This article does not constitute legal, tax, or financial advice; please seek professional input as appropriate to your situation.