September is Life Insurance Awareness Month! While most policy holders understand the core benefit of life policies, one healthcare-related advantage may be overlooked: the use of life insurance policies to generate tax free income while minimizing the impact on Medicare’s Income-Related Monthly Adjustment Amount (IRMAA) surcharges. Affluent retirees can leverage the cash value of a life insurance policy to generate income and potentially save on costly IRMAA surcharges.

Understanding Medicare IRMAA
Before delving into the strategy, it’s crucial to understand what Medicare’s IRMAA policy is, is and how it can affect retirement expenses. IRMAA stands for Income-Related Monthly Adjustment Amount, and it’s an additional premium cost that affluent retirees may have to pay for Medicare Parts B and D. For high earning workers, it’s important to be mindful of this future impact. Whether – and to what extent – a future Medicare recipient would be affected by IRMAA surcharges is based on their Modified Adjusted Gross Income (MAGI) in retirement. Retirement MAGI income includes Social Security benefits, pension, dividends, capital gains, IRA distributions, RMDs, and income from a job – leads to greater surcharges. It is essential for affluent Americans to plan ahead and manage their MAGI before they start Medicare (eligible at age 65) which has a two-year lookback provision.

2023 IRMAA Brackets (Note that brackets are adjusted annually by xxx)
Single
1st: < $97,000 (no increase) 2nd: $97,001-$123,000 (35% increase) 3rd: $123,001-$153,000 (87% increase) 4th: $153,001-$183,000 (139% increase) 5th: $183,001-$500,000 (192% increase) 6th: $500,001+ (209% increase)

Using Life Insurance Cash Value
Many retirees own life insurance policies, which typically accumulate a cash value over time. This cash value can be an invaluable resource for generating income without affecting MAGI, the metric used to determine your IRMAA surcharges.

Most permanent life insurance policies, such as whole life or universal life, allow policy holders to withdraw a loan against the policy’s cash value. These are tax-free and do not count as income for MAGI calculations. This can potentially save tens – or even hundreds – of thousands of dollars in healthcare costs during retirement.

Incorporating life insurance cash value into your retirement income strategy can be a powerful tool for optimizing finances. By doing so, policy holders can generate additional income while minimizing the impact on Medicare IRMAA surcharges, potentially saving a significant amount of money during retirement.
For an individual potentially impacted by IRMAA (MAGI above $91,000) it’s essential to consult with financial professionals to determine if this strategy is suitable for your specific circumstances. Life insurance policies vary so professional guidance is crucial. With careful planning, clients can make the most of their retirement savings and enjoy their golden years with financial peace of mind.

Case Examples
Below are two examples of higher earning workers who are projected to be impacted by IRMAA when they begin Medicare age at 65. In each case, it is assumed that the person needs 80% of their pre-retirement income to maintain their standard of living in retirement.

45-year-old Maryland man with tobacco use, current income: $118,000

  • Utilizes life insurance policy to lower MAGI, drops from 2nd IRMAA bracket to 1st bracket: $10,000 annually lowers MAGI from $170,000 to $160,000 at age 65
  • Previous lifetime surcharge projection: $62,510
  • New lifetime surcharge projection: $0
  • Savings: $62,510

50-year-old California woman with high cholesterol, current income: $185,000

  • Utilizes life insurance policy to lower MAGI, drops from 4th IRMAA bracket to 3rd bracket: $15,000 annually lowers MAGI from $230,000 to $215,000 at age 65
  • Previous lifetime surcharge projection: $344,244
  • New lifetime surcharge projection: $124,159
  • Savings: $149,356