About Gary SorensenWhere oh where are the taxes going? Ask your client this question: “Do you think personal income taxes are going to stay the same, go down or go up?” The consensus likely will be that taxes would be increasing, given the current state of the economy and government-spending rate. Your next question should be: “When do you want to pay your taxes? Now, later, never or don’t care?” Most people would answer “never,” but taxes are one of two certainties in life, and they are the only one we must address while we are still among the living, as the only other certainty is death. With this in mind, here is one sales idea that, if performed correctly could result in multiple sales — the life plus life concept.
Essentially, life plus life equals a little now and none later. Let’s explore the scenario below to better understand how this concept works.
Your client has a qualified asset they are pretty sure they won’t need in the future, but they know that they will be forced to take distributions at age 70 ½ (Uncle Sam wants his taxes, hence the required minimum distribution). The client has been throwing around the idea of converting to a Roth IRA, but that means paying all the taxes now, and with outside funds. They could take a distribution from the IRA to pay the taxes, but if they are younger than age 59 ½, they could be facing a 10 percent IRS penalty tax, which ultimately could result in leaving them with an IRA that’s considerably less valuable, and depending on their age, they may not have time to make up the difference. Roth IRAs have their place and can be a valuable income-planning tool, but careful consideration is a must.
So instead of creating a dollar-for-dollar benefit, why not leverage the dollars? Take the tax-qualified dollars and place the funds into an immediate annuity with a life-only payout. Why, you ask? As you know, qualified dollars are 100 percent taxable and could be subject to early withdrawal penalties from the IRS, but if you have a life payout on the immediate annuity, you take advantage of one of the exceptions to the penalty. The client will be spreading the payments over their lifetime, which means paying a little tax a little at a time. Since we are using a life-only payout, upon the death of the policyholder, the immediate annuity has zero value (and no tax obligation to the beneficiaries). We use the payment stream from the immediate annuity to fund a life insurance policy — the only guaranteed way to leverage your client’s dollar’s value. In fact, with careful planning we can use the income from the immediate annuity to pay the tax and fund the life policy. The net affect to your client is $0, as we are simply repositioning an asset they already have with little to no cost. This is not an original idea, but it is one that, given the nation’s current state of affairs, could make a huge difference.
To illustrate how this works, in this example, the client has $300,000 in an IRA and we are going to transfer $100,000 into a single-premium immediate annuity with a life-only payout. The annual income generated is $ 5,890.65 for the client’s life. Assuming that the client is in the 28 percent tax bracket, we will hold out $1,649.38 to pay the taxes, which leaves us with $4,241.27 to use for premiums to fund a life policy with a starting face value of $100,000. The life policy has an increasing death benefit, so we pump cash into the policy to create an internal cash build-up. So why do this? According to the illustration, at age 70 (20 years out) we will have a projected death benefit of $259,113 with an internal cash account value of $159,113. Life insurance cash build-up can be accessed for multiple purposes, from emergency funds to an income stream. Pay a little now versus pay more later; a creative case designs to meet the needs of your clients. Try exploiting this strategy the next time you find yourself working with a client looking to retire while seeking ways to mitigate their tax hit.
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