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Full Life Insurance for Your Stretch -IRA • The Insurance Pro Blog



SAFE The law from 2019 wrote about the rules for inherited IRAs. The biggest change eliminated a mandatory minimum distribution (RMD) scheme for younger heirs without spouses that allowed them to "extend" the distribution period for their lives. The new rules require that these individuals instead distribute all money in the IRA within a ten-year period beginning when the original IRA owner dies. This much more consolidated time period forces out much more money from an inherited IRA and should theoretically increase the tax revenue for the US government. Catalog

Such changes lead us to re-evaluate IRA strategies and develop new approaches to building and maintaining prosperity.

Saving for retirement with an IRA versus full insurance

The most obvious issue that came out of the rule change for life insurance agents was, the new rule will make life insurance products at cash value a more attractive alternative to traditionally saving money in an IRA? I suspect that much of it depends, but for the part of the population that likes risk-return parameters for stocks and is trying to buy those stocks in an IRA, I seriously doubt that whole life insurance is an absolutely better substitution.

For those who want to buy bonds — primarily or exclusively through bond funds as most investors usually do — whole life insurance and indexed universal life insurance become more realistic alternatives given their similar risk-return profile as bonds. But that does not always mean that you should choose life insurance instead.

Using a well-designed full life policy and Vanguard Long-Term Investment-Grade Fund (VWESX) historical results, we modeled a scenario that puts the entire life insurance policy against an IRA that uses 100% bond exposure over a 20-year period. The Bond Fund IRA beats the entire life policy regarding the accumulation of cash value during this 20-year period by $ 159,000 in cash throughout the life policy against $ 247,000 in the IRA.

However, the entire life policy has a death benefit of $ 394,000 after 20 years, which means that it beats the IRA in terms of older value. However, it is unlikely that someone in his / her mid-40s – the age assumed in our scenario – would start saving money in an IRA with the sole intention of transferring the money to another generation.

  IRA Example 5k per year
Source: Portfolio Visualizer

Incorporating life insurance into an IRA plan at retirement

It is more likely that someone at or near retirement can earmark money saved as something they want to give to a child or grandchild. This was one of the main selling points of the "Stretch IRA" strategy.

What if the individual in our previous example chose the IRA and accumulated $ 247,000 in account balances in the mid-1960s and determined that this money was not necessary for his retirement income needs? If his plans were to figure out a way to maximize the value of this investment as something he passed on to his grandson, we might be able to increase its value by incorporating life insurance into the plan right now.

First, if we skip the life insurance discussion and simply assume that the IRA will continue to grow at the same rate as it has for the past 20 years, the IRA's account balance should be approximately $ 1.1 million for another 20 years – IRA owners are now in their mid 80's. If he dies at this point, he will leave an IRA balance of $ 1.1 million to his grandson, who will now have to withdraw all the money from the IRA within the next 10 years. Assuming that the beneficiary / grandchild begins to withdraw $ 150,000 per year from the IRA for 10 years and then withdraws the remainder from the IRA at the end of the ten-year period, he should have earned approximately $ 1 million from the inheritance – this after he pays the taxes paid on the distribution. This presupposes that he leaves IRA funds invested in bonds.

  Standard RMD Inherited IRA
Source Portfolio Visualizer

If the IRA owner instead uses part of the IRA money to buy life insurance as part of his plan to maximize older value, he can get an advantage in the following ways.

He begins by withdrawing enough money to earn $ 20,000 for a full life insurance policy over the next 20 years. Assuming he dies again after 20 years, his grandson will receive $ 240,000 in IRA and a death benefit of $ 630,000. The $ 630,000 death benefit is income tax free with no requirement to withdraw it from an account during any specific timeline.

The grandchild is free to invest the death benefit in the way he deems appropriate. He was able to buy the same bonds as Grampa did and achieve an account balance of $ 1.4 million after 10 years.

  VWESX Example
Source: Portfolio Visualizer

He was able to buy shares and have about $ 2.2 million after 10 years – I used the Vanguard 500 Index Fund (VFINX) historical results to forecast this balance.

  VFINX Example
Source: Portfolio Visualizer

Or he could buy another income-focused investment that grows to $ 1.7 million in 10 years and can generate $ 114,000 in annual dividend income — I used the historical development of the Reaves Utility Income Fund (UTG) and its current dividend yield to predict this balance.

  UTG Example
Source: Portfolio Visualizer

None of these scenarios even address the $ 240,000 remaining in the IRA that the grandchild inherits. This increases the wealth created by the above-mentioned investment alternatives with the help of the life insurance death benefit.

Bottom Line

There are several ways to incorporate life insurance to build and preserve wealth. In the example above, we can greatly increase an investment of $ 100,000 made over 20 years when we use life insurance as a complement to a wealth / transfer plan. It is certainly not the only way life insurance can add value to one's financial strategy, but it does highlight a way of overcoming the potential wealth lost through the rule changes brought about by the SECURE Act.


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