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    How to Help Clients Leave a Legacy (Without Using a Stretch IRA)

    Posted by Bill Jackson J.D. CLU on Wed, Feb 12, 2020 @ 12:00 PM

    When clients think about leaving a legacy for their children, they have several choices. In the current environment there is a high probability the earmarked asset is an IRA account. With the passing of the SECURE Act, that could pose a problem. Here’s why:


    Under the SECURE Act, the concept of preserving tax deferred growth and distributing small amounts over life expectancy is no longer available for most beneficiaries. This could potentially mean a major tax impact to the children during the ten years after they receive their benefit.

    Could an unlikely combination help these beneficiaries?

    We don’t often talk about annuities and life insurance in the same breath. But let’s consider what an accumulation annuity plus a good death benefit focused life insurance policy would look like when used together. Could this combination improve outcomes?

    Let’s find out.

    Say we have a 60-year old male client with $200,000 in an IRA annuity, which was a result of a rollover from a previous employer’s retirement plan. This money is targeted for emergencies or as a legacy for the client’s children. We’ll compare leaving this money in a qualified asset versus a non-qualified asset that would provide a tax-free death benefit to the children.

    Since we will be withdrawing money from the annuity, there are a few key points to know:

    ·         A 10% annual penalty free withdrawal needs to be available

    ·         The Client needs to be 59 ½ so there will be no IRS tax penalties

    ·         The Client will withdraw 10% penalty-free as indicated in the chart below over the next 10 years 

    ·         The amounts withdrawn will be reduced by 20% due to federal tax. 

    At a 4.5% indexed interest on the annuity, it would look something like this: 


    Assumptions: Fixed Indexed annuity with a 5-year surrender charge period and a penalty free withdrawal privilege of 10% of the accumulation value in all contract years during the surrender charge period. Payments taken at the beginning of the period.

    Since this is not an income play but a way to pay for life insurance premiums, we will choose a strong death benefit focused Indexed Universal Life Insurance (IUL) product that will provide the tax-free legacy we are looking for but also supply accessible cash values through loans or withdrawals to be used for emergencies or perhaps, a long term care event.

    If we pick a point in time near life expectancy, say age 85, we can compare the result of leaving the money in an IRA or transferring it to an insurance policy.

    The chart below shows a tax-free death benefit. As you can see with the blue line, from this policy we could expect a death benefit of $581,707 at age 85.

    Blog illustration graphic-1

    Source: Ensight and Carrier illustration for Global Atlantic Lifetime Foundation dated 1/5/2021. Based on Male Preferred Non-Tobacco, Age 60, Premium outlay: $16,000, Non-MEC. 

    And the following chart shows the potential cash value of the same life insurance policy, usable for emergencies on a tax-free basis. The cash value would potentially be $288,523 at this same age. 


    Source: Ensight and carrier illustrations for the Global Atlantic Lifetime Foundation dated 1/5/2021. Based on Male Preferred Non-Tobacco, Age 60, Premium outlay: $16,000, Non-MEC. 


    Next, we'll compare this option to leaving the money to the children in an IRA annuity

    In the IRA annuity, we’ll assume a value of $342,855, which is what the $200,000 would’ve grown to in 12 years at 4.5% interest tax deferred.

    At age 85, the balance at the same interest rate would be $313,191 due to RMDs that were withdrawn. As future RMDs are taken, the available balance for a legacy transfer would continue to reduce, potentially impacting the client’s legacy.


    Source: https://www.schwab.com/ira/understand-iras/ira-calculators/rmd

    If the client has an emergency at age 85, what would actually be available for them to access?

    Due to the tax impact only $250,552 would be available from the IRA annuity as opposed to $288,523 from the life insurance policy. If death were to occur at this age and assuming the beneficiary’s tax bracket is not bumped beyond 22% Federal, for example, the beneficiaries would get $250,552 after tax in a probate free benefit from the IRA annuity. On the other hand, the life insurance policy in this example, would provide $581,707 in a tax and probate free death benefit to the beneficiary.

    Granted, the client has paid $50,034 in taxes earlier in the pre-retirement/retirement period compared to only $12,675 in tax on RMDs through age 85. Of course, the total tax on RMDs would be much higher if the client were to live longer, which would also most likely reduce the legacy value of the IRA annuity even further.

    A new take on leaving a legacy after the passing of the SECURE Act

    With the removal of the Stretch IRA option for most beneficiaries under the SECURE Act, a rethink of the process for achieving a tax efficient legacy is in order. Using an accumulation annuity and taking advantage of the 10% penalty free withdrawal feature to channel the proceeds to pay the premium for a life insurance policy offers the potential for a substantially higher post-tax benefit for this hypothetical client’s children.

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    Tags: IUL (indexed universal life insurance), Inherited IRAs, best sales techniques



    This content is for informational and educational purposes only and is not designed, or intended, to be applicable to any person's individual circumstances. It should not be considered as investment advice, nor does it constitute a recommendation that anyone engage in (or refrain from) a particular course of action.

    Withdrawals will reduce the contract value and the value of any protection benefits. Additional withdrawals taken within the contract withdrawal charge schedule will be subject to a withdrawal charge. All withdrawals are subject to ordinary income tax and, if taken prior to age 59 ½, may be subject to a 10% federal additional tax.

    Please note that in order to provide a recommendation to a client about the transfer of funds from an investment product to a fixed insurance or annuity, you must hold the proper securities registration and be currently affiliated with a broker/dealer.  If you are unsure whether or not the information you are providing to a client represents general guidance or a specific recommendation to liquidate a security, please contact the individual state securities department in the states in which you conduct business. 

    Partners Advantage Insurance Services and their representatives do not give tax or legal advice.  Accordingly, any tax information provided is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer. Encourage your clients to consult their tax advisor or attorney.

    Indexed universal life insurance policies contain fees and expenses, including cost of insurance, administrative fees, premium loads, surrender charges and other charges or fees that will impact policy values.

    Guarantees and benefits are based on the claims-paying ability of the issuing insurance company. Broker/dealers, insurance agencies and their affiliates who sell the policy make no representations or guarantees regarding such ability.

    With Universal Life it is possible that coverage will expire when either no premiums are paid following the initial premium or subsequent premiums are insufficient to continue coverage. Changes in policy coverage amounts are subject to policy limits. Increases are subject to underwriting and may require additional premium.