Where is one going to find money for life insurance? Great question! For those in the life insurance industry like Lloyd Agencies, it can actually benefit both you and your client to help your client find the money for their life insurance plan.
Life insurance is not utilized as much as it should be, according to LifeHealthPro. Most clients think they don’t have enough money to pay the premiums. However, there are three sources of funds that most clients have but do not tap into.
1: IRAs and other retirement plans
IRAs are loaded with taxes. That money is better used to fund either Roth IRAs as Roth conversions or life insurance. Both options can transfer taxable funds to tax-free territory, permanently.
The leverage is better for life insurance than Roth IRAs. IRA funds grow tax-deferred, meaning that money will be subject to tax in the future, probably at a higher future tax rate on a higher IRA balance.
For a client that wants tax-free retirement funds and better control over future distributions, life insurance is a better panning strategy- especially if the IRA funds won’t be needed during life and the client wants to pass those funds to beneficiaries.
Life insurance is also a tax-efficient and reliable estate planning move because the stretch IRA might be eliminated. A good option is to take down IRA funds, pay the tax now, on a lower balance at a likely lower rate and then use the remaining funds (after taxes) to fund life insurance. That way, the family will end up with more tax free money. Optimum time for individuals to use this strategy of acquiring reasonably priced life insurance is when individuals are in their 60’s, there no longer a 10% early withdrawal penalty and before required minimum distributions begin.
2: Taxable investments and savings accounts
Taxable investments such as bank and savings accounts, funds and stocks can be leveraged for life insurance. Bank accounts that are earning virtually no interest are the best funds to use first, unless they exist for a reason. Otherwise these types of funds do nothing and earn nothing. Unlike IRA funds, they can be withdrawn without a tax bill. Life insurance can dramatically increase the value of assets.
Mutual funds may fall into the same category as savings accounts except there may be a need to keep some specific funds classes for asset diversification. Be careful with stocks. Before liquidating any stocks to free up cash for life insurance, you BETTER know the basis of these stocks. If they are highly appreciated (low tax basis), they should be help until death so heirs can get the step-up in basis. Look to sell the losers. This will create a tax loss that can offset other capital gains and free up funds for life insurance. Selling high basis assets or chronic non-performers are also great sources of funds. If you let go of your assets, you can make better use of the proceeds.
3: Dead assets
Dead assets can include stock that great grandma passed down decades ago. If these assets are not highly appreciated and are only held for emotional reasons, they might be better used for life insurance. Hard assets like real estate or personal property fit into this category as well. It is likely that the following generation will not have as strong emotional ties to these assets and sell them anyway.
Non-performing and tax-inefficient assets are bogging down clients and can be better spent on life insurance with a lower tax bill.