Multi Generational IRA Planning to Increase Life Insurance Sales

Multi Generational IRA Planning to Increase Life Insurance Sales

Over 43 million households are invested in Individual Retirement Accounts (IRAs) – and chances are your clients have a share in that number.

But perhaps they’ve come to realize they don’t need their IRA assets for income.  Or maybe they’ve developed a portfolio of non-IRA assets that are sufficient to provide a comfortable lifestyle in retirement.

Due to the government’s Required Minimum Distribution (RMD) rules, the preference might be to continue deferring taxes on the IRA for as long as possible.

When the children inherit the IRA, their maximum years of deferral are based on their ages at the time they inherit the IRA.  This fixed, maximum period cannot be extended regardless of whether the children pass away before this period has expired.

The children typically name the grandchildren as their beneficiaries.  If the children pass away prior to the end of their maximum deferral period, the grandchildren inherit the balance of the funds, and the remaining balance of the deceased child’s maximum deferral period.

How Multi-Generational Beneficiaries Can Solve These Issues

Using Multi-Generational beneficiaries, your clients could make some minor changes to their current IRA beneficiary designations to enhance their legacy.

The key is understanding that IRA rules allow Designated Beneficiaries to continue deferral over a maximum deferred period that is based on their own life expectancy.

Therefore, when the grandchildren inherit the IRA, their younger ages enable them to continue the tax-deferral advantages for a longer period of time than the children could.  This compounding of tax-deferred growth can create significant increases in your client’s legacy.

Simply consider replacing the children’s IRA inheritance by purchasing a Life Insurance policy with a death benefit equivalent to the pre-taxed value of the IRA, and make the children or an ILIT the beneficiary of the policy and the grandchildren the beneficiary of the IRA.

One significant advantage of using Life Insurance is that the death benefit is received by the children free from income tax.  Thus, increasing the new inheritance, unlike an IRA inheritance that may be fully taxable to the children.

Consider This

Assume the parent’s IRA is projected to be worth $500,000 at the surviving spouse’s death.

The children would receive a $500,000 income tax free Life Insurance death benefit.  The grandchildren would receive a $500,000 IRA and each grandchild will “stretch” the IRA deferral benefits over their individual life expectancies, according to IRS rules.

The grandchildren’s life expectancy is typically 20 to 40 years longer than the children’s life expectancy.  This extension of the deferral period could be very advantageous to the overall performance of the IRA legacy.

Typically, the Life Insurance premium for clients over age 70 ½ are paid by using a portion of the RMD that your client’s are required to withdraw from the IRA.  As you can see, Life Insurance can play an important role in the overall strategy of Multi-Generational Planning of your client’s IRA.

For more information, contact the Life Sales & Marketing Team.