By Bill Monte, The Estate, Legacy and Long-Term Care Planning Center of Western NY
Life insurance can be used very effectively as a legacy and long-term care planning tool. Not only can it be used to help preserve and protect your retirement assets from the exorbitant costs of an unexpected need for long-term care during your lifetime (particularly nursing home care), but it can also be utilized to create a scenario where all of your retirement assets are passed 100% tax-free to your children and grandchildren at your eventual passing. No estate taxes. No income taxes. No capital gains taxes.
It is my strong opinion that people should be viewing life insurance as yet another asset class into which they can further diversify their overall portfolio—an asset class that cannot be negatively affected by a downturn in the stock market and one that doesn’t correlate with the other asset classes in your portfolio. During the first half of 2020, we have experienced substantial volatility in the equity markets, and I’m afraid that the second half of the year won’t be any different. People have seen the stock-based portions of their retirement portfolios experience a wild roller-coaster ride.
It is times like these where diversifying some of your non-IRA retirement assets into tax-free life insurance makes tremendous sense. Repositioning dormant, non-needed taxable investment assets and savings held outside of a traditional IRA or 401(k) (e.g., liquid savings/CDs at the bank, taxable brokerage account assets, and especially Roth IRA assets) into tax-free life insurance can create a significant and meaningful tax-free pool of dollars for your chosen beneficiaries that is many multiples larger than the lump-sum amount that is deposited into the life insurance policy.
For example, if a 60-year-old couple hypothetically repositions $100,000 as a single deposit into a joint or second-to-die life insurance policy (no further premiums are required after year 1), they will create an immediate tax-free life insurance amount of approximately $500,000, a 5-to-1 multiple. For a 70-year-old couple, that same $100,000 hypothetical lump-sum deposit amount would create a tax-free life insurance amount in the $350,000-$400,000 range, while a younger 50-year-old couple would create something between $750,000-$800,000. Most people don’t know that they can apply for life insurance all the way up to age 90!
This substantial and immediate tax-free wealth that is created by this life insurance legacy plan can be used by the children as beneficiaries to help them pay any tax liabilities that they may face when they inherit their parents’ assets. With the passage of the SECURE Act on January 1, 2020, those taxes to the children will now be greatly increased due to the recent dramatic changes in the stretch IRA rules. Non-spouse IRA beneficiaries now only have a 10-year period to taxably remove everything from the inherited IRA.
Now from a long-term care planning perspective, the new hybrid life insurance/long-term care combination plans have become extremely popular. In a nutshell, the same non-needed, dormant legacy assets that you have that are held outside of your traditional IRA or 401(k) can also be repositioned into this hybrid life insurance/long-term care plan as a single deposit.
Again, no further premiums will be due after this first year. This single deposit also creates an immediate tax-free life insurance amount that is many multiples larger than the lump-sum amount deposited. If you need long-term care during your lifetime, you are allowed to tap into the death benefit of the policy on a tax-free basis to pay for your long-term care. Generally, you are able to receive a tax-free amount each month of up to 2% of the life insurance amount, and you are at the controls as to how you use that monthly amount to pay for your long-term care. Whatever you don’t end up using for long-term care during your lifetime goes directly to your beneficiaries at your passing as a 100% tax-free life insurance benefit.
If you would like to learn more about how tax-free life insurance can be used quite effectively in your legacy/wealth transfer and long-term care/asset protection planning, I’m here to help. Please feel free to give me a call at 585-721-2385 or send me an email at [email protected], and we can chat about any questions that you may have. Let’s see how tax-free life insurance could be effectively utilized in your specific situation.
About Bill
Bill Monte is the president of The Estate, Legacy & Long-Term Care Planning Center of Western NY, with 33 years of experience in the financial industry. Bill is the leading legacy and long-term care planning expert in the area and has helped hundreds of Rochester area residents implement personalized plans that help solidify their legacy and long-term care planning. As an independent financial professional, Bill prides himself on putting his clients first and always working in their best interest, designing plans that are tailored to each person’s specific financial situation and goals. Bill holds multiple professional designations, including Chartered Financial Consultant® (ChFC®), Chartered Life Underwriter® (CLU®), Long-Term Care Professional (LTCP), and Certification for Long-Term Care (CLTC®). To learn more about Bill, connect with him on LinkedIn or schedule a free consultation by contacting him at (585) 721-2385 or [email protected]. You can also register for his recent webinar “How Your Kids Can Inherit Your IRA 100% Tax-Free” here.