Cautions When Combining SPIAs And Life Insurance Contracts

When marketing a single premium immediate annuity with a life insurance contract, there is a threat that the IRS may combine the two contracts, endangering the tax-free status of the life insurance death benefit, says John W. Homer, president of Oxford Financial Group, Salt Lake City.

Here are some steps that Homer feels agents must follow when applying this sales concept:

–Never purchase the SPIA and the life insurance policy simultaneously. The life insurance should always be purchased first. When possible, agents should leave a month or two between the two purchases.

–Use different companies for the SPIA and the life insurance policy. Do not fund the insurance policy directly from the annuity. Pay the first-year premium of the insurance policy with cash that does not come from the SPIA.

–Purchase more life insurance than the amount of premium paid into the SPIA.

–Observe all procedures necessary to keep the life insurance policy out of the insureds estate. The SPIA may be owned by the annuitant.

–When insuring only one spouse, when both are living, and the life insurance is owned by an Irrevocable Life Insurance Trust, consider giving the surviving spouse the same rights and access to the trust as might be found in a family trust, or an A-B trust.

–Be sure to consider the income tax implications of the SPIAs exclusion ratio and how the income tax liability is impacted after the entire basis has been recovered.

–When using Universal Life, be sure to fund the policy such that: (1) the premiums can be reduced to offset the increase in income taxation upon the full recovery of basis in the SPIA; (2) the policy will be sustained even at minimum interest rate levels; (3) the full death benefit will continue beyond policy maturity under any extended maturity provision.

–Do not mix and match insureds and annuitants. If an annuitant dies who is not an insured, the source of funding for the policy disappears.

Barry Higgins


Reproduced from National Underwriter Life & Health/Financial Services Edition, October 8, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.


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