An IRA-to-IUL conversion can be a sound part of a comprehensive financial plan to help your clients maximize and balance the financial growth, stability and tax benefits of their overall retirement strategy. An IRA-to-IUL conversion allows your client to pay taxes now on assets moved from a tax-deferred account to a tax-free vehicle.

Funds for an IUL policy need time to accumulate, so an IRA-to-IUL conversion should only be used for a portion of your client’s IRA that is not needed for income within the next 10 years. Additionally, life insurance policies require medical and sometimes financial underwriting to determine eligibility.

If these two qualifiers are met, the following five factors will help you and your client decide if an IRA-to-IUL conversion is a good fit for their overall financial plan.

1. Analyze your client’s IRA to make an informed decision

Assess the total tax liability the IRA will generate over your client’s lifetime. In your analysis, address after-tax growth potential using reasonable assumptions for growth and taxation on the post-tax IRA value in 10, 20 and 30 years. Also, analyze what would happen to the IRA value if market performance is less favorable than assumed.

2. Compare the IRA analysis to an IUL illustration

Comparing the total tax liability of moving IRA funds from a tax-deferred status to a post-tax status will help you determine if an IRA-to-IUL conversion makes sense for your client. If the total tax liability is less using an IUL policy, this strategy may make sense as part of your client’s overall planning strategy.

3. Handle taxes responsibly

You client will be responsible for the taxes owed on the funds being withdrawn from his or her IRA. To determine the best approach for paying those taxes, suggest your client meet with a qualified tax advisor. A properly planned IRA-to-IUL conversion strategy handles taxes outside of the IUL policy.

4. Funding the policy

It is critical to fund your client’s IUL policy efficiently. This means putting funds into the IUL policy quickly to maximize accumulation and ensuring the premium pattern does not cause the IUL policy to become a modified endowment contract (MEC)¹ as loans from a MEC are not tax free. Generally, a 5-pay premium² is the ideal premium payment structure for an IRA-to-IUL conversion strategy. In some instances, a 7-pay or 10-pay may be appropriate to avoid moving your client into a higher tax bracket in any given year.

5. Death benefit

Death benefit protection is the primary purpose of life insurance, which is a benefit an IUL can deliver that an IRA does not — a legacy above and beyond the account value for your client. The death benefit is also an important consideration when structuring an IUL policy. Careful structuring of the death benefit is necessary to ensure the policy does not become a MEC and to maintain the tax status of the funds within the policy.

Conclusion

Like many financial strategies, an IRA-to-IUL conversion is beneficial for some while not appropriate for others. If you have a client who is approaching retirement or already retired and looking for death benefit protection, the potential for growth with protection from market losses, the opportunity to diversify their retirement assets and the tax advantages, a properly structured indexed universal life policy via an IRA-to-IUL conversion may be right for them.

Give me a call to discuss this retirement strategy to see if it makes sense for your clients’ unique financial planning needs.

¹A MEC policy is one in which the life insurance limits exceed certain high levels of premium, or the cumulative premium payments exceed certain amounts specific under the Internal Revenue Code. For policies that are MECs, distributions during the life of the insured, including loans, are first treated as taxable to the extent of income in the contract, and an additional 10% federal income tax may apply for withdrawals made prior to age 59 ½.

²A 5-pay premium describes how you will fund the IUL insurance policy: with premium payments over five years. Likewise, a 7-pay or 10-pay references funding the IUL policy with premium payments for those given year durations.

This sales idea is provided for use only by those financial professionals licensed to provide investment advice. Discussion of securities transactions including the recommendation to liquidate assets allocated within securities (including IRAs) places their insurance license at risk. When including the discussion of taxes as it relates to the holistic financial planning approach for clients, advisors cannot hold themselves out as being able to provide tax advice and all clients should be encouraged to seek the guidance of a qualified tax professional prior to making a decision regarding their personal situation.

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