Life Insurance Sales Insights
Are you in the know?

The tectonic plates are shifting and the terra on which we rest now rumbles. The largest shift of financial assets in recorded history is starting – and I’m not referring to the stock market.

Thousands and thousands of Baby Boomers and members of the “Greatest Generation” are making plans for the transfer of their existing wealth and financial assets. Trillions of dollars will move from grandmother to son, and from dad to daughter; the only question is how much will remain with its rightful beneficiary and how much will be confiscated by the IRS. The answer has a lot to do with you – the trusted financial professional – and your use of life insurance in the following situations.

IRA’s and qualified plans
Your IRA owners may not know it, but the largest beneficiary of their IRA may be the IRS. Ordinary income taxes can erode almost 40% of the IRA’s value before it reaches the desired beneficiary. Even the Internal Revenue Service’s most favorable distribution options don’t offer recognizable relief.

Avoid this tax-trap and help minimize the total taxes on an IRA by nearly 50% using life insurance as a transfer tool in replace of the IRA. Consider using mandatory IRA distributions (that are not needed for income) to pay premiums on a tax favored life insurance contract. The small annual premium can leverage a sizeable death benefit that will transfer without tax to the beneficiary greatly enhancing the client’s legacy.

Non-qualified deferred annuities (NQDA)
Not unlike IRA’s, NQDA’s are a preferred choice of many individuals accumulating assets for retirement. And in the same respect, the taxation of NQDA’s makes them a nightmare at the owner’s death. Owners and beneficiaries alike benefit when other strategies for asset transfer are considered.

One option is might be to exercise the NQDA’s 10% free withdrawal provision and use the withdrawal to pay premiums on a wealth transfer life insurance contract. The death benefit and the remaining value of the NQDA are received by the beneficiary at death – maximizing the total value of the asset. In addition, SPIA’s and/or Lifetime income riders may also be employed as a guaranteed funding mechanism in this transfer strategy.

Low yielding, interest bearing accounts The magic of compounding growth isn’t that magical when there’s little or no appreciation. In today’s banking environment, customers with CD’s or money market funds are yielding an average of 2.25% - which is even more painfully reflected by an after tax yield of 1.50%. It would take over 40 years for an account to double in value at that pace.

Life insurance as a transfer tool can offer financial benefits that far exceed that of traditional savings certificates. In some instances the life insurance can create an asset four times greater than the interest bearing account - making it virtually impossible to achieve similar results though interest appreciation on any type of money market account. Plus, the death benefit can ‘lock-in’ a transfer value that’s guaranteed and tax free!

Whether you call it wealth transfer planning, asset arbitrage, or tax efficient capital transfer, the end result is the same. Positioning life insurance in a non-traditional manner can yield guaranteed, tax free and extremely competitive planning outcomes for customers owning IRA’s, NQDA’s and low interest bearing accounts. Failing to introduce these solutions as a planning alternative may result in a loss of assets for your customers and a loss of income to you.

Zack Derryberry
Managing Director
BHC Life Insurance Division
April 2009
 

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