The Whole Picture

In the first, a client with nearly $500,000 in an IRA had a pension plan and other income and did not need to start RMDs from the IRA. He did, however, want to provide for his wife and to pass on as much money as possible to his children tax free. Says Charron, “We set the insurance premium at this year’s RMD. As RMDs will hopefully increase over time, any RMD over the amount necessary to fund the insurance will go to the investment account. If he ever needs that money back he can get it, and at his death his wife will have access to [the death benefit and whatever is in the investment account].” The policy was set up in an access trust (an ILIT, allowing one spouse access to its assets), so at his death she has access to the money; whatever is left will go to their children tax free.

In the second example, three partners in a $4.5 million business set up a buy-sell agreement. All in their early to mid-40s, they were concerned about the three major reasons for an agreement, says Charron–death, disability, and retirement. The life insurance part provides payments at the death of a partner; the investment portion takes care of the maximum non-modified endowment contract premium to fund a buy/sell. The corporation set up the investment portion as a tax-deferred sinking fund, allowing a tax-free buyout in case of disability or retirement.

David Huber, a planner in Buffalo Grove, Illinois, uses a variable product from Pacific Life that he says is similar to Quantum II. He structures it as a private pension-type arrangement by using the tax structure of the life insurance product to provide retirement benefits down the road. The client funds the investment portion for as long as possible, then withdraws up to his basis tax free. If he still needs income and no longer needs the life insurance portion, he can continue to withdraw funds–to an extent. Huber cautions, “You don’t want to take too much out of the policy so that it doesn’t support itself, or you could end up with phantom income.”