Maximize Your Clients' Legacy: Writing More Life Insurance and Fixed Annuities Through Multi-Generational IRA Planning

Did you know over 43 million households invest in Individual Retirement Accounts (IRAs)? Among them, many clients find themselves in a unique position: they don’t need their IRA assets for income. Instead, they face challenges tied to Required Minimum Distributions (RMDs) and the goal of creating a lasting legacy for their families.

This presents a prime opportunity for financial professionals to add value by introducing strategies involving life insurance and fixed annuities.

The Problem: Limited Deferral and Taxable Inheritance

When clients pass away, their IRA beneficiaries must adhere to rules limiting the tax-deferred growth period. For children who inherit, this period is based on their life expectancy at the time of inheritance. While beneficial, this deferral ends when the children pass away, even if the funds haven’t been fully distributed.

Moreover, inherited IRAs are fully taxable as income, reducing the wealth passed on to the next generation.

The Solution: Multi-Generational Planning

A well-structured multi-generational plan can extend the benefits of tax-deferred growth and reduce the tax burden on your clients’ legacy. Here's how:

1. Redefine IRA Beneficiary Designations:

   • Designate grandchildren as beneficiaries of the IRA instead of children. Since grandchildren are younger, they enjoy longer life expectancies, extending the period of tax-deferred growth.

2. Replace Children’s IRA Inheritance with Life Insurance:

   • Purchase a life insurance policy with a death benefit equivalent to the pre-tax value of the IRA.
   • Name children or an irrevocable life insurance trust (ILIT) as the policy beneficiary.
   • This strategy ensures the children receive an income tax-free inheritance.

3. Fund the Life Insurance with RMDs:

   • Use RMDs required from the IRA to pay premiums for the life insurance policy. This aligns with your clients' goals to preserve wealth for the next generation.

The Benefits in Action

Let’s break it down:

• Scenario:
  A client’s IRA is projected to be worth $500,000 at the surviving spouse’s death.
  • Children’s Inheritance: They receive a $500,000 income tax-free death benefit from the life insurance.
  • Grandchildren’s Inheritance: They inherit the $500,000 IRA and stretch deferral benefits over their longer life expectancies, potentially adding decades of tax-deferred growth.

By combining these strategies, your client creates a significantly enhanced legacy for both generations.

Sales Ideas to Maximize Opportunities

1. Introduce Fixed Indexed Annuities:

   • For clients concerned about market volatility, fixed indexed annuities can provide stable, tax-deferred growth and additional income options.
   • Use annuities to supplement or replace income from RMDs if clients don’t need the funds for living expenses.

2. Layered Legacy Planning:

   • Recommend pairing fixed annuities with life insurance to create a balanced legacy strategy.
   • Discuss how annuities can offer guaranteed lifetime income streams, freeing up other assets for wealth transfer strategies.

3. Leverage Wealth Replacement Trusts:

   • Use life insurance within an ILIT to transfer wealth efficiently while reducing estate tax exposure.

Questions to Ask Your Clients

• Income and Legacy Goals:

  • “Do you anticipate needing your IRA assets for income in retirement?”
  • “What legacy goals do you have for your children and grandchildren?”

• Tax and Distribution Concerns:

  • “Are you concerned about the taxes your heirs will face on inherited IRAs?”
  • “Would you like to maximize the tax-deferral period for your IRA assets?”

• Insurance and Annuity Fit:

  • “Have you considered using a portion of your RMDs to fund a life insurance policy to protect your heirs from income taxes?”
  • “Would guaranteed income from a fixed annuity help provide stability while preserving your other assets for legacy planning?”

The Takeaway: Your Role as the Architect of Legacy

By blending life insurance and fixed annuities into multi-generational IRA strategies, you help clients maximize their wealth transfer potential while addressing tax inefficiencies. These tools aren’t just solutions—they’re opportunities to deepen client relationships and expand your practice.

Start the conversation with your clients today, and show them how a thoughtful plan can turn their hard-earned savings into a lasting legacy for generations to come.