Many people in their 50’s, 60’s, and 70’s, have a huge hunk of money sitting in their IRA or 401(k). Unless you are over age 72, you are not yet required to take distributions from these accounts and, if you are like most of our clients, you do not have a plan for distributions.
Once you retire, the plan should be to start distributing this money and living off of it for the rest of your life. If you do not come up with a plan, the IRS has one for you.
Since you have not paid taxes on the money in these accounts yet, the government wants their money. You have to start taking RMDs, or required minimum distributions, at age 72 or face a very large penalty.
These required minimum distributions are usually small enough that if you are only taking the minimum, you are going to leave a significant amount of money in your account and leave your kids with a tax bomb.
Many people in retirement realize that they are not going to need this IRA money, or at least a large bit of this money. If this is the case, you need a plan to get your money out of an IRA or 401(k) in a tax efficient manner.
We will go over one insurance policy below that allows you to not only do this tax efficiently, but also gain some life insurance and long term care benefits as well.
Taking out your IRA money
Below, we are going to go over an example of one hybrid long term care insurance policy specifically designed to use IRA money to fund it. Hybrid long term care is a combination of life insurance and long term care insurance in one product.
For this example, we are going to use $100,000 as the initial deposit from an IRA. You can double or triple this amount if you want more benefits or half it if you want less.
We are illustrating this policy for a couple, both aged 65, both non-smokers. For smokers, the initial deposit will increase slightly to get the same benefits.
If you are younger than 65, the initial deposit will be lower for the same benefits. If you are older than 65, the initial deposit will have to be increased for the same benefit.
How does this hybrid long term care policy work?
While this policy can sound complicated, when we break down the moving parts, it is easy to see the benefits it can provide.
You are going to perform a direct rollover from your IRA or 401(k) account into another IRA with this insurance company. A direct rollover allows you to not have to pay taxes on this money right away.
This IRA at the insurance company is an annuity that is going to take in this $100,000 and distribute it over 10 years to pay a premium to a life insurance company. This premium paid is going to be $12,000 for 10 years.
You are going to have to pay taxes on the $12,000 a year that is being paid to the life insurance company since this money has not been taxed. This means it is going to cost you a little more than the $100,000 transferred over initially.
Paying the taxes in small increments instead of paying them up front on the $100,000 is going to decrease the tax bracket you are in and allow you to pay taxes overtime.
You were going to have to pay taxes on this money, or your kids were going to have to pay taxes on this money, eventually. There is no avoiding these taxes.
Life Insurance Benefits
This policy is going to have about a $150,000 death benefit which is paid out after both spouses pass away. This is called a second-to-die policy.
If both of the spouses die before the 10 years is up, your family is going to get the $150,000 death benefit as well as the remaining balance in the IRA at the insurance company since it has not been emptied yet. ‘
While a $150,000 benefit for a $100,000 deposit sounds great, we are never going to recommend this policy for someone just wanting a life insurance benefit. There are much better policies for this. The real benefits from this policy are going to come from the long term care benefits.
Long Term Care Insurance Benefits
This policy allows you to possibly double your death benefit if you need long term care services.
It pays $3,000 for long term care for 100 months of total care for both spouses. One spouse could be at 20 months and other at 80 months; you can split the 100 months anyway you want.
With the first 50 months of benefits, the policy is basically giving you your life insurance benefit early and tax free.
With the second 50 months, you are just getting an extra benefit. This is where the real advantage of the policy kicks in.
The waiting period for this policy is 90 days, unless it is used for home health care. That care has a 0 day waiting period and the policy will start paying on day 1.
Home health care is one of the greatest benefits this policy provides. It gives you the ability to age at home instead of in a facility if that is your choice.
$3,000/month is not going to cover most people’s long term care expenses. The average monthly cost for home health care in the U.S. is currently $4,385. This number only increases for assisted living and nursing homes.
$3,000 is going to greatly reduce the burden on your finances and your family.
If you wanted enough benefit to cover the entirety of the monthly long term care bill, you could move over more money from your IRA. An initial $200,000 deposit is going to produce $6,000 a month of benefits for this same couple.
Do know, if you use the long term care benefit, your family will not receive the death benefit anymore. For double the benefit for long term care services, this is a trade off people who buy the policy are willing to take.
This policy is not going to be right for everyone. You want to make sure you evaluate all your options and find a plan for retirement and your money that best suits your needs.
At Cardinal, we talk to our clients to learn their needs, wants, and hopes for their retirement years and for their family before we recommend any insurance products.
We have found many people that this product does work perfectly for, and none of them even knew something like this existed. It allowed them to turn their IRA into a vehicle to protect themselves and their family.
If you are interested in learning more if this policy might work well for you, or if there is something else out there, give us a call or fill out the form below!