Turning Qualified Assets Into Tax-Free Life Insurance With LTC: Case Study

The Situation

Joan White is a 69 year-old woman with an existing IRA currently valued at $640,000. Next year, at age 701⁄2, she will have to begin taking her required minimum distributions (RMD) from the IRA, but she would rather pass these assets to her children. While she has other assets that will fund her retirement income needs, she has no other qualified assets. Joan is currently in excellent health but concerned that she may need long-term care (LTC) at some point in the future. She would like to have some coverage so she is not a burden to her family.

Designing the Plan

Using the $640,000 of IRA assets to purchase a Single Premium Immediate Annuity (SPIA), the RMDs no longer apply, as all of Joan’s qualified assets are now annuitized. Using the Cannex SPIA quoting tool, Joan’s advisor found a life-only SPIA would provide an annual payment of $42,680.1

The assets from the IRA will be taxed at ordinary income rates (currently at a 40% tax rate), so her after-tax annuity distributions will be $25,600.

Their advisor uses the after-tax income stream from the SPIA ($25,600) to purchase an M Financial Proprietary No- Lapse Guarantee Life Insurance Policy with an indemnity long-term care rider. Joan receives preferred underwriting, qualifying her for a life insurance policy with $1,000,000 of tax-free death bene t coverage that will last until her age 110 with a $500,000 LTC bene t should she need care in the meantime.

The Solution

Joan’s advisor was able to solve all her objectives, turning $640,000 of pre-tax IRA assets into $1,000,000 of after-tax death bene t, or $500,000 of LTC bene t ($10,000 per month) by annuitizing her existing IRA contract through a SPIA contract. Joan no longer has to worry about RMDs because those assets have been annuitized. She has con dence knowing that she is taking care of her children, whether that is by covering her own long-term care expenses with the LTC rider or through the life insurance assets if she does not need long-term care.



Experiences of clients with life insurance products will depend on their unique facts and circumstances and we cannot guarantee the same results for all clients.

This material is intended for informational purposes only and should not be construed as legal or tax advice and is not intended to replace the advice of a qualified attorney, tax advisor or plan provider.

Death benefits and guaranteed annuity payments of life insurance products are subject to the claims paying ability of the issuing insurance company.

Due to a unique combination of tax advantages on both the accumulation and distribution of funds within it, cash value life insurance can be a powerful way to reduce income taxes over the long term.

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AALU: Life Insurance Provides Financial Security & Peace of Mind (2014).
Non-MEC policy gains may become taxable upon withdrawal, surrender, or lapse.
Subject co the rules and regulations ofIRC Section 7702; policy withdrawals, loans, and loan interest will reduce policy values and may reduce benefits.

For Educational Purposes Only This material is intended for informational purposes only and should not be construed as legal or tax advice and is not intended to replace the advice of a qualified attorney, tax advisor, or plan provider.

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