One of my colleagues had a very successful financial representative call him for help with one of his clients. The representative who called was very frustrated and trying to come to terms with incorporating the sale of life insurance into his practice.
My colleague could tell by the representative’s voice that he was struggling with a product that was difficult for him but potentially very beneficial for his clients. I couldn’t help but smile, knowing that this conversation could be an opportunity for this representative to expand his business and add a new level of diversity and acumen.
This all started when a client came to him wanting to utilize life insurance as an estate planning tool. She was a widowed retiree with a fairly substantial estate. She had a majority of her assets in qualified retirement plans, several of which she did not specifically need to draw income from. She felt comfortable with the income she was living on and with the plan they had created to ensure she would not run out of funds. These were “extra” assets, earmarked for her children who would be the beneficiaries of her estate.
The client had heard from another source about how qualified retirement accounts were the least favorable kind of asset to leave in the estate because, at death, the beneficiary would have to pay income taxes in respect of the decedent. Using the money in the qualified accounts to fund a life insurance policy could help to mitigate the loss due to taxes.
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The representative was not unfamiliar with the concept of drawing from a retirement account in order to pay for a life insurance premium. He simply believed that the purpose of life insurance was to pay for final expenses or estate taxes. Now, faced with his client’s concerns, what he needed to see was how a tax-free death benefit would ultimately provide a better legacy than the qualified account.
A well-leveraged plan
What my colleague showed him was a projection based on several assumptions and strategies. First of all, the client would be taking an income stream from the qualified account in order to pay the premium. The income tax liability would be limited to the amount withdrawn, and the balance would remain invested in the qualified account. The life insurance would provide a tax-free death benefit.