Life Insurance
I have recommended to a 65 year old psychiatrist client who is still working to use his IRA $ to fund a life insurance policy for his wife. He currently has a $1M term policy that is about to expire and he is not insurable. We discussed the possibility of converting to a permanent policy, but he feels that the annual premiums are too expensive – about $28k. So I suggested that he use his retirement plan (he has both an IRA and a Defined Contibution Plan) monies of about $800k to fund the premium. The stumbling blocks are that 1) he is not comfortable that he has enough money in his retirement plans to fund his retirement and 2) the $ that he would pull out of his plans to pay the premium would be currently taxable – so he would likely have to pull ou $35k to net $28k. Any thoughts or sggestions would be greatly appreciated.
Permalink Submitted by Bruce Steiner on Tue, 2010-01-05 04:09
From the facts presented, it isn’t clear whether he needs life insurance. If he’s only in a 20% income tax bracket (which is the case here if a $35,000 withdrawal would net $28,000 after income tax), then even though he’s still working, his income is modest. But if he’s not otherwise insurable, the right to convert the term policy before it expires is valuable.
I would first look to see whether there is some way he could be able to pay the premiums without having to dip into his qualified plan and IRA benefits. If not, I would then consider either buying the insurance in the qualified plan (if that’s permissible), or else taking some money out of the plan to pay the premiums, so as not to lose the right to convert the policy, given that he’s not otherwise insurable. Neither of these is ideal, but if he’s otherwise uninsurable, either may be better than giving up the insurance.
Permalink Submitted by charles lore on Sun, 2010-01-10 16:03
Try to get a projection of the cash value buildup in the permanent policy. THis can be a valuable resource of funds in retirement. Also there should be an ability to borrow vs. CV. When these are taken into consideration then life insurance may make more sense than you may have thought. G
Permalink Submitted by Al Fry on Mon, 2010-01-11 13:48
Is the current policy outside his estate? Even though there are no estate taxes this year, under current law they’ll come back next year with only a $1 million exemption. Not that anyone believes it will stay that way, however with this congress, you never know!
Permalink Submitted by Bruce Steiner on Mon, 2010-01-11 13:55
Whether to give away the insurance policy to get it out of his estate is a case by case decision. In many cases, it’s better to keep the insurance and give away some other assets. Of course, his uninsurability cuts in favor of giving away the insurance in this case, assuming that there’s a good chance he’ll live for at least 3 years.
Please note that this, like all posts in this forum, are intended merely as general information, and that he should consult with tax/estates counsel who can advise him based upon the particular facts and his objectives.