Using an Annuity to Fund Your Life Insurance Policy?...Smart Move!

Enjoying Retirement

A very intelligent way to pay the premiums for your (or another’s) life insurance policy is to use your annuity. This will allow you to leverage your money, offering excellent value to the insured, owner, beneficiary or all of the above.

You do not want to overlook this option! The key, if you are under age 59 ½, in order to avoid an additional tax penalty of 10%, is to use a Table A/ lifetime settlement option with a certain period in which to offer an income stream for a beneficiary if the annuitant was to pass away within that time frame. What this means is that a particular amount of funds in the annuity (or all of it) will be used to create an immediate annuity (settlement) that will generate a monthly, quarterly, semi-annual, or annual income stream for the client. This income will not be used for spending, but for paying the premium for a permanent life insurance contract.

The type of life insurance contract that it will fund is a matter of preference/need, but most any type will have to be underwritten. Therefore, if anyone interested in doing this is uninsurable, then this concept would be of no interest to them personally, yet it might be for someone they know...so keep reading. A Whole Life policy for example, can build cash value that can be accessed at any time in the life of the contract tax free. A no-lapse Universal Life with a Long-Term Care rider gives the client the flexibility of using the product while alive for an extended care need, and could still leave a death benefit to a beneficiary for whatever amount is still remaining that wasn’t used. These are just a few options of many.

This leveraging concept can benefit the insured while alive, but can also greatly benefit the beneficiary. As a hypothetical example, let’s say Tim takes $100K from his annuity to table and create an income stream that would pay him $500/month for life, or for a beneficiary up to 30 years, if he passed away the day after it was created. Tim decides to take out a No-Lapse Universal Life policy with a Long-Term Care Rider that has a $200K face amount that costs him $500/month. Four years later, Tim starts experiencing transferring and toileting issues in which he has to start receiving custodial care. Over the next year he uses up $100K in LTC benefits out of his life insurance policy, but sadly, he passes away. His wife Sheila will not only receive $100K tax-free from the remaining death benefit in the life policy, but will also start to receive the $500/month from the settlement for the next 25 years with minor taxes on the $6K per year!

So in this example, $100K was returned back to Tim in the form of custodial care coverage but essentially an additional $100K tax-free and $150K (taxable over 25 years) was given to Sheila. Not a bad way to leverage one’s money, right? So what are you waiting for? See what your options are for making your money work for you and your loved ones.

About the author: Kyle McDonald holds FIC, FICF, FSCP® & CLTC designations. His viewpoint on life insurance is simple, “Anyone with a family must have life insurance. In the end, life insurance is for others you care about, not you.” He is ready to help you and your family get the best option available. Contact Kyle today at   1-800-651-1953 or KMcDonald@Pivot.com.