News you can use

Using Excess RMDs To Increase Your Legacy

Written by Eric Estrada | Aug 21, 2024 2:33:16 PM

The London Bach Choir has a storied history, starting in 1876 with its performance of Bach’s B Minor Mass. For nearly a century, it remained relatively obscure until a game-changing moment in 1969. Mick Jagger of The Rolling Stones invited the choir to collaborate on a track that would become legendary: "You Can’t Always Get What You Want."

This classic lyric, "You can’t always get what you want, but if you try sometime, you just might find, you get what you need," serves as a powerful reminder for retirement advisors. When clients over 70½ consider using required minimum distributions (RMDs) to fund life insurance, it’s crucial to set realistic expectations and guide them to viable solutions. Here’s how to do it:

  • Recognize Middle-Market Realities:

    • Limited Financial Justification: Most middle-market clients don’t face estate tax concerns due to high lifetime exemptions. They also lack an income replacement need in retirement, which diminishes the financial rationale for purchasing life insurance.
    • Carrier Caution: Despite aggressive marketing, carriers may be hesitant to approve policies without clear financial necessity, especially if traditional needs are absent.
  • Understand the Underwriter’s Role:

    • Gatekeepers of Approval: Underwriters have the final say on whether a policy is issued. Marketing materials may promise solutions, but the underwriter’s assessment is what counts.
    • Avoid Blind Submissions: Submitting an application without understanding the underwriter’s perspective can lead to rejection. Instead, ensure the case is well-prepared and justifiable.
  • Leverage the Percent-of-Net-Worth Solution:

    • Alternative Justifications: Some carriers allow policies based on a percentage of the client’s estate, even if traditional needs aren’t present. This can be useful for liquidity, inheritance equalization, or asset distribution.
    • Identify Receptive Carriers: Know which carriers are open to this approach and be ready to articulate a clear purpose for the coverage.
  • Strategic Application Process:

    • Targeted Carrier Selection: Don’t submit applications randomly. Identify carriers sympathetic to your client’s situation and work with them to craft a compelling case.
    • Custom Cover Letters: Include a detailed cover letter outlining the purpose of the coverage. This can significantly improve the chances of approval.
  • Invest the Extra Effort:

    • Worthwhile Compensation: Successfully navigating the complexities of RMD-funded life insurance for older clients can result in justifiable compensation for the advisor.
    • Long-Term Client Satisfaction: By guiding clients through this process, you help them achieve a meaningful financial outcome, even if it’s not what they initially envisioned.

The London Bach Choir’s collaboration with The Rolling Stones didn’t just give them exposure; it cemented their place in popular culture. Similarly, by carefully guiding your clients through their RMD options, you can help them secure the insurance coverage they need, even if it’s not what they originally planned.