Wealth Transfer Strategy Using Deferred Annuities to Fund Life Insurance

Wealth Transfer Strategy Using Deferred Annuities to Fund Life Insurance

Do you have clients that originally purchased a Deferred Annuity to find that they no longer need it for retirement income purposes?  Often, these clients intend to “leave it for the kids.”

Although a Deferred Annuity is a great vehicle to accumulate funds for retirement, it is not an efficient vehicle to transfer wealth since it may be taxed twice at death.

How can your clients avoid this?  By reducing or replacing the Annuity with more tax-efficient assets.

How It Works

Annuity Maximization is simply an asset repositioning strategy in which the Annuity is exchanged or converted to a Single Premium Immediate Annuity (SPIA).  A SPIA provides an income stream for a chosen number of years based on a single deposit made to purchase the Annuity in addition to your client’s age and health status.

Your client may then make gifts of the after-tax income generated from the SPIA to an Irrevocable Life Insurance Trust (ILIT).  The ILIT then has the funds to purchase a Life Insurance policy on your client’s life for an amount that replaces or exceeds the value of the Deferred Annuity, to benefit the heirs.  The Life Insurance policy pays out the tax-free death benefit at the end of the client’s life.

You want to be sure to avoid taxation on your client’s Deferred Annuity as it can be taxed up to 70%.  By converting the Deferred Annuity to a SPIA and then leveraging the SPIA income withdrawals to purchase Life Insurance, you’ve created a simple solution to increase the amount transferred to the heirs of your client.

For more information on this plan or any other Life Insurance sales ideas please contact your Life Sales Marketing Manager.