Transferring IRA to Cash Value Life Insurance? Life Insurance Sales Strategy to Avoid

There are a number of strategies out there when it comes to life insurance sales; however, many make no sense at all. When clients call for opinions on strategies, it can be very difficult to give them the advice they are seeking. Most life insurance agents are always looking to get money from an IRA. These agents will suggest that the client place their money into a cash value insurance policy. In many cases, the numbers will make sense, but this is not always true and it is important to know when this investment strategy is beneficial and when it can be harmful.

Most insurance sales people will try to persuade the client into believing that IRAs can be tax adverse and that a cash value life insurance policy would be a beneficial choice regarding investing because the money in the policy is allowed to grow and be removed without any tax being applied.

Pay IRA Taxes with Money Loaned from Life Insurance

The title of the following section actually makes a statement. Let's use an example of a 60 year old client who has an IRA worth $470,000. The client can cash in the IRA over the next five years in order to receive funds to set up a cash value life insurance. The agent will persuade the client that this is a good choice instead of letting the money sit in an IRA. The agent continues to explain that if the money remains in the IRA, the client will be forced to take distributions between the ages of 77 and 86. By funding a life insurance policy with a cash value with $95,000 a year taken from the IRA, the client will benefit in the long run.

If this client chooses to take the route mentioned, he would fund a cash value policy and during the second through the sixth year, he would borrow $39,000 from the insurance policy to pay for the taxes on the IRA withdrawals that have been made. These amounts are based on a 40% income tax bracket. The cash value policy would begin to grow, allowing the client to withdraw $39,000 each year with no tax penalties. The question is whether this is a good idea. While it may sound appealing to many clients, the answer is no. This is not in the best interest of the client.

Fixed Indexed Annuity with Guaranteed Income Rider vs Cash Value Life Insurance

Many clients will ask what will happen if the full amount of $470,000 was withdrawn from the IRA and used to fund a fixed indexed annuity that has a guaranteed income rider. When the client reaches the age of 78, how much would he receive as a guaranteed income for life benefit? The answer is between $109,000 to $130,000 each year for the remainder of the client's life. This is beneficial when compared to money over the course of just 10 years, such as the case with a cash value life insurance policy.

Should the client stay in the 40% bracket for taxes upon entering retirement, there would be about $66,500 remaining after all taxes have been paid and this amount would be available each year for the remainder of the client's life.

Results of the Fixed Indexed Annuity with Guaranteed Income Rider and Cash Value Life Insurance Policy:

Based on what has been discussed above, there are two options:

  • $39,000 tax free between the ages of 78 and 86 with the income not being guaranteed.
  • $66,500 each year guaranteed for the rest of the clients life.

Most insurance sales men will use this strategy, trying to convince clients that purchasing a life insurance policy with their IRA would be the best choice. However, if you take a moment to compare the numbers, you will learn that the strategies pushed upon clients by insurance companies and salesmen are not beneficial at all in certain cases.

In conclusion, this entire concept is nothing more than a scheme from the insurance industry. It is not a sound financial decision for clients to make if the numbers don't make sense. If anyone tries to present this strategy, do not make hasty decisions. Contact us and we can help you make the right financial decision that will provide you with the best benefits possible.

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