The question is, how can the use of a life insurance product maximize tax benefits and future family inheritance values for an executive in his early 60’s who has a $500,000 retirement plan distribution available which can be rolled over into an IRA. The executives family in this example does not need current income from this asset now and is unlikely to need it in the future.
While there is no urgent need for life insurance, having added estate liquidity provided by its tax free death benefit advantage is always a plus, as is minimizing the income tax bite that would reduce the value of an IRA asset to the executives estate beneficiaries. The goal in this case is to maximize future estate values by minimizing the taxation of the IRA asset upon the death of the executive, while not forfeiting access to the values involved should they ever be needed.
The strategy to create these benefits, while allowing for substantial liquidity, comes in two pieces.
The first step involves the use of an Equity Index Annuity (EIA) product, in this case one that guarantees over $28,000 in income per year starting at the end of the first year, as the IRA rollover product. This type product can also be obtained with an up front bonus, in this case $20,000. However, this involves opting for an extended back end surrender charge (ten years) if the product is liquidated. Since these funds are not needed to maintain the lifestyle of this family, no such liquidation is anticipated, so the executive opts to also utilize this bonus feature.
The second step involves a choice between the use of an Equity Index UL life insurance product (EIUL) or a Guaranteed Death Benefit UL (GDBUL) life insurance product; both funded with $20,000 per year in premiums for 20 years. The $28,000 annual income distributions from the EIA product will fund this. Depending on the executives tax rate some out of pocket funding of these life insurance premiums is anticipated.
The primary advantage gained by the use of the EIA IRA rollover product is the level of guaranteed lifetime income it provides while also allowing access to the principal if needed. However, since this is a qualified IRA asset the funds accessed would be subject to income taxation. And, a withdrawal of principal from the EIA product will trigger a proportional reduction in the guaranteed income amount thereafter. So, while the liquidity is an added plus this family is not likely to need to access that cash (or the income from the rollover to the EIA) to maintain its living standard.
Now back to the choice between life products.
If the GDBUL product is used, it can provide an initial death benefit of almost $700,000 fully guaranteed by the premium payments alone to age 120. However, this guarantee is achieved by eliminating cash value accumulation inside the life product. After just a few years the cash value is zero and remains zero thereafter. The positive achieved is the immediate and long term creation of $700,000 in tax free death benefit proceeds if the executive should pass away at any time.
One way to think of this type life insurance is as a term product guaranteeing the payout of the death benefit for life, simply based on the payment of 20 annual premiums; in this case funded by the net after tax distributions from the EIA IRA product.
The advantage of the EIUL product comes in later years.
The starting face amount with this type of life insurance product is half that of the GDBUL’s death benefit, but the advantage gained is substantial cash value accumulation. And, that accumulation literally pushes up the policy death benefit, based on IRS rules, which reaches $700,000 by year 21. After that, the death benefit more than doubles by age 100.
At all times the cash values are substantial and growing. Since the 60 year old executive is far more likely to live past age 80 the use of this type life product will maximize the future assets passed to the executives heirs, while also creating substantial liquidity that can be accessed later in the executives retirement if funds are then needed.
To make this scenario work only $475,000 of the IRA amount would be rolled over into the EIA product, leaving $25,000 (taxable) to fund most of the $20,000 the first year’s life insurance product premium. The above noted bonus paid within the EIA will replace most of this $25,000 inside the IRA rollover EIA product.
The net result is a dramatically enhanced estate value, a great deal of added liquidity and depending on the life product choice access to substantial cash values if needed. There are many uses for life insurance where pre-tax retirement plan rollover funds are tied up in IRA products. This is just one example how future values for heirs can be substantially enhanced at a minimal cost to an executive and their family.
