When the goals are maximizing wealth transfer and minimizing tax exposure, the situation may call for a pairing of permanent life insurance with an annuity.
Not too long ago, an 82-year-old client walked into advisor David W. Hoffmann’s office with wealth transfer on his mind. “He told me he wanted to pass on as much money to his heirs as he possibly could,” recalls Hoffman, a Certified Financial Planner for D.B. Root & Co. in Pittsburgh.
Some time later the elderly client departed Hoffmann’s office satisfied, having committed, at his advisor’s suggestion, to purchase a life-only, single-premium immediate annuity in tandem with a permanent life insurance policy as a means of maximizing the wealth transfer potential of his estate.
People like annuities because they can grow their assets on a tax-deferred basis. But eventually the tax tab will come due – whether through annuitization or in a wealth transfer context – when the annuity contract passes on to beneficiaries. Then it may be time to consider pairing permanent life insurance with an annuity. For advisors and estate planners with senior clients, purchasing permanent life insurance along with an annuity is a relatively common maneuver, not only to use the tax-favored life insurance death benefit to maximize wealth transfer potential but also to blunt the impact of the estate tax and income tax double whammy that beneficiaries could face by inheriting an annuity that carries a sizable capital gains liability.
In the case of Hoffmann’s 82-year-old client, the payments from the single-premium immediate annuity went directly to cover the premiums on a universal life policy with a guaranteed death benefit. And since the SPIA payments were greater than the premium the client otherwise would have been able to afford, a simple crunching of numbers indicated the client would be able to leverage the annuity to access a UL policy with a larger death benefit – about 10 percent larger, Hoffmann says. Running the numbers also showed that buying a SPIA and a UL contract would be more cost-effective than purchasing a single-premium life insurance policy, another option Hoffmann and his client considered pursuing.
The client’s good health and single-minded drive to preserve as much of his estate as possible for his heirs made the entire dual-sided transaction straightforward – a “pure wealth transfer” maneuver, he explains. “It wasn’t anything fancy. We shopped around to find as much life insurance as we possibly could. We tried to maximize the death benefit and keep the cash value at a minimum. Cash value didn’t really matter. Then on the annuity side, we just shopped around to get the maximum payout, with a product from a good, quality company of course – one rated A or better.”