Roth conversion or cash value life insurance – Which is best for you?

Hey, welcome back. I thought I would cover a subject that is primarily educational for you guys today. We hear a lot of people come to us and they have a life insurance agent or a financial advisor suggesting to them that they purchase life insurance instead of doing a Roth conversion. So today I want to focus on that question. Should you use IRA funds to purchase cash value life insurance or should you do Roth conversion? Because that's kind of how the question is laid out to people, is you shouldn't do conversions, instead you should buy life insurance. And so I want to talk about that, I want to kind of talk about the marketing messages that are, that go on around that. And I want to help you to kind of understand maybe how to think through that, to see if that's really a good decision for you. But I want to get into the nuts and bolts a little bit of it too. I'm not trying to give you an exhaustive dissertation. I just want to help you with my experiences to help you to understand how that, how maybe that fits into your situation or it's really doesn't fit and you just need to move on. So most of the marketing messages say, gosh, you don't need to do Roth conversions, you need to do life insurance. Kind of the overview of the concept is they want you to take money from your ira, pay the tax on it as if you were doing a Roth conversion, but then to put the money into a life insurance product. They may be trying to get you to get one big lump sum, and they may be trying to get payments over a period of time, doesn't really matter. But you cannot buy life insurance inside of your ira, so you have to do it outside the ira, right? So you have to distribute it, pay the tax, and then put the money into the insurance policy. So I want to explain kind of how the strategy works, what the tax benefits would be to do either one of those, what the limitations are, and then how really to determine whether it's the right answer for you or not. And I've got a sample that I'll kind of just verbally go through with you so that you can kind of put the pieces of everything together for you in a way that's there. And as a reminder, we do not sell insurance, we do not manage investment portfolios. Our only objective is to give you advice and to show you how to make whether strategic Roth conversions are in your best interest and if so, what's the best game plan for you. We use math based models and everything that we know from being certified financial planners for a long time in that. So as you already know, the, you know, the benefits of taking money from an IRA and putting it into a Roth is that once you get the money into the Roth now, all the growth is totally tax free. You do not have to take required minimum distributions. And any distribution that you would make is totally outside of the tax world. And when you leave it for your heirs, it's also totally free of any tax. What's really important to understand is that if you're going to do the life insurance strategy from your IRA, you probably want to do it after age 59 and a half to avoid the penalties of taking money out of the IRA in that regard. Same way with Roth conversions, it's. They're better after 59 and a half so that you don't have penalties to deal with there. When it gets down to cash value life insurance, I found that many people have been persuaded that you just, there's no reason to do life insurance. You don't need it, you shouldn't buy it, it's expensive, the returns are terrible, all those kinds of things. But there's, there are a couple things that only life insurance can do for you. And in that regard, it's worth at least kind of having a conversation. Most of the people that we work with under Roth conversions probably wouldn't. It would be very expensive to do the life insurance because of health, health issues and just age, if nothing else. Right. I will say that cash value life insurance is best used when you have a lot of time and you got time working on your side. But back in the day, when I was still in private practice and did the implementation solutions for people, we did a lot of life insurance alongside a Roth conversion. And that's probably the takeaway that you'll get today from me is if it's of benefit to you at all. It's part of a strategy where you walk along and you do both of those. But when you get into life insurance, I mean, some of the key features are that whatever money you have in there can accumulate tax deferred tax free. In some cases, depending on how it's set up, you have, I'll just say accumulation of that cash value. You got the tax deferred growth, you've got the ability to take out loans free of any tax, so you can get income and not pay tax on it. And when you pass, you're able to leave death benefits to your heirs, your spouse or your heirs. And in a lot of cases, the death benefit is going to be a Whole lot more than the actual money that you put into it. So it's a good way to build your estate as well. And as great as they are, those kind of policies do have some limitations when you get to the age where you're really considering doing substantial Roth conversions. The biggest, in my opinion, there are really two main reasons to consider the life insurance as a tag along strategy beside your regular Roth conversions. The biggest reason why you would want to consider purchasing life insurance as part of your Roth conversion strategy comes down to potentially a need that you will have for income later. That would be one of the reasons. So you have to come to some sort of a determination of will you need additional income beyond your other sources later. And I don't mean, well, I've already taken care of that, I'm going to do it through here. I don't mean that's not the level I'm at right there. Right. What I'm really trying to say is, bottom line, outside of your pension, Social Security, rental, real estate, oil and gas revenues, all those kinds of things, outside of all that, is there going to be a point in time where you're going to need money from your investment portfolio? And if the answer to that is yes, then you should at least now let's start talking about, well, will life insurance, is that a best option for me or not? So you got to figure out, do I need extra income? And then the big question is, okay, when will I need it? Well, if you need it next year, that's not what life insurance is really designed to do. I'm going to do another video about using annuities alongside Roth conversions. And if it's not up when you watch this, it'll be up within the next couple of days anyway. So do you need income and if so, how much and how many years from now? Right. The other thing to consider on life insurance is how old are you? Because we all know as you get older, the life insurance part gets a lot more expensive. Are you healthy? Are you in fairly good health? Are you a smoker? Do you have heart problems? Do you have diabetes? Your health status is really a big determiner that somebody should ask you about and help you to decide whether insurance is good for you. And then obviously, as already said, the amount of income that you'll need and how many years until you need it. So all those are just kind of the components that go in to bake the cake to figure out whether or not insurance could be a good strategy for you. It is a pretty well generally accepted and known fact that in many cases life insurance can generate a much higher income stream for you dollar for dollar than it than a normal diversified investment portfolio can. And there are several reasons for that. I'm going to put a link in the description of this video where I've created a real simple PDF document that you can go download that helps you to understand why insurance companies are able to pay out a higher rate of interest, I'm sorry, a higher income stream than what many people can do out of just a standard diversified type of portfolio. Kind of how it works is if you were to do this, you would take money from your IRA, pay taxes, and if you do it after 59 and a half, then you would take those funds and put them into a life insurance policy. Now what a lot of the marketing messages seem to imply and the sales calls that we've been told about are that if you're going to convert $100,000 out of your IRA, they want you to put the 100,000 every year for five years or seven years, whatever the case is, into life insurance. And in my opinion for most people that's a bad idea because you're putting, you're taking something that was fairly, fairly accessible and liquid and now you're putting it into a different, totally different state where you can't go get all the cash. You're going to have surrender charges, you're going to have life insurance costs going into it. So just purchasing based on the benefits, we pay it based on the features is not the right way to do it. You have to really get a good comprehensive financial plan together to know it, to understand whether it works for you and to what degree. And then, and I'll get into some more of that stuff in just a minute. That's really the simple as it is is instead of converting it and putting it into Roth, you'd take money and you'd put over into the life insurance product. So the benefits though of doing that, if you did that would be at some point down the road you turn on these tax free loans and so now the cash value becomes available to you in the way of tax free loans. The Roth provides income totally tax free also, but in the cash value life insurance, you typically get a lot more income per dollar that has gone on. Now there are prices that you have to pay for it. Illiquidity being one of those. Right. One of the other benefits would be from an estate planning standpoint, if you, whenever you die, all those benefits go directly to your heirs, totally tax free. And typically the amount of death benefits are going to be greater than the amount of heir cash value that you put into the policy. Which is just kind of the way insurance works, right? You can take loans and withdrawals from the cash value. If you put it over there in the early years though, there are limitations, there are surrender periods, all kinds of those kinds of things that you really need to kind of be aware of. Part of the bottom line to me is that if you have an income need later, which is one of the reasons, then you should consider it as a possibility to look into depending on your health and your age, or if you're trying to take money that you're never going to use in the IRA and created an even bigger legacy for yourself and for your family, that'd be another reason to use insurance. But I think in all these moderation is the key. I think you need to grasp the unders, the importance of really aligning a strategy for purchasing life insurance with your cash flow needs, your future cash flow needs first and get a detailed financial blueprint designed for you that helps you to see the, the impact of inflation and taxes on your conversion and on your income needs and all those kinds of things. That's really the best place to start. This is not an all or none decision of life insurance or not, or even annuities or not. And any, any advisor slash agent that would put all your money into an annuity or into a cash value life insurance is somebody that you need to report to the state bar association for the, the insurance examiners rather and probably need to really see if they ethically are doing what's in your best interest for that. But you know, part of this is really a more of a long term planning solution for you. You want to make sure that the policy that you would get is going to fit your overall retirement and financial plan and that's the first place to start. Consult with a good certified financial planner that focuses on doing financial planning like our guys do. And it's probably not your investment guy, although it might be your investment person if they also do and charge fees for financial planning, probably is not your cpa. They normally don't have the tools to be able to kind of put all these pieces together for you. Some do, but most of them don't. That's not what their career is, what they've chosen to do. So real quickly, let's just kind of hit the pros and the cons and then let me give you a really good bottom line example. So the pros of putting doing the Cash value life insurance alongside a Roth conversion is you got tax deferred growth, you get tax free withdrawals through these loans. You got to structure properly to do all that stuff. You got a death benefit for your heirs and you have some potential for long term care benefits. Some of the policies are structured in a way where you can kind of get some long term care against the death benefit. I mean against cash value. Some of the cons or the negatives toward doing that is that you got a lot higher premiums compared to just term insurance. And many of you or many of the people that we talk to are at a place in their life that they really don't need life insurance anyway. So. So just the death benefit alone probably is not that big of a benefit for most people. And I've already said the premiums are a lot higher the older that you are. And the strategy is really best used when you're several years away from retirement or a few. But back in the day, I did do a lot of insurance for folks that were just retired and they weren't going to need the income for 10 or 12 years once inflation caught up and all those kinds of things and it turned out to be really good for them. So I'm not going to make a carte blanche statement that you got to do it when you're in your 50s or something like that. It is better because you got more time, but normally at that time you're focused more on being able to get to retire. And then there's a lot of complexity around some of these policies. And so you really have to work with somebody that knows what they're doing and they've done it before and they know how to structure the policies the right way. Insurance will also normally give you a lower rate of return than just regular investments. So you have to want the income benefits from the insurance because that's where, in my opinion, you win two ways. One is the cash flow stream can be higher compared to investment portfolios. And the other is if somebody dies, the death benefits, you know, turn out to be a really good financial deal for somebody. So let me real quickly, let me give you the illustration. So several years ago, I'm thinking of one particular client, they were just retiring. They had about a million and A half in IRA funds that were converting about $180,000 a year is what our game plan was going to be. Down the road about 10 years from now, they needed about $40,000 a year to supplement their Social Security and a real small pension that she had from a school district. Both their heirs were going to be in higher tax brackets most of their lives. So some of that, the way the financial outcome worked for them is we, we went out and we purchased a policy that would, that they put $50,000 a year in for seven years. So of the 180,000, 50 of it did not go into the Roth, it went to an insurance policy. The other 130 went into the same investment products that they had before, the same investment strategy portfolio, all of it, none of that changed. It just became taxable once they moved it over there. And then now they got all the benefits of the Roth. The life insurance product was a seven year product. And there are a lot of ERISA laws and federal tax laws, I should say, that govern how these policies need to be put together so that you avoid a taxable situation. So again, you got to work with somebody that knows what they're doing, right. So 130 went to the Roth, 50 to the, to the insurance. And then in 10 years, the projected amount of loans, and that's projected, not guaranteed, but the projected amount of loans that they would be able to take out of those policies totally tax free each year for the rest of their Life was about 40,000, which was exactly what their shortfall was going to be in 10 years. So that's how you use it, hand in glove with your insurance. So now all their investments, it didn't matter what their investments did the rest of their life, up or down, if that policy performed anywhere close to what it was supposed to, they weren't going to ever need to tap those unless they wanted a new car or take a big trip or something like that. Their income got a check mark. They just needed to live the next 10 years to get there. And then everything was taken care of and it was all tax free. Right. There are a couple of caveats to project. You have to be careful the projections. You'll know what kind of policy you're getting and what are the assumptions that are used. Are they using current interest rates, are they using historical. I like to see, when people run illustrations, I like to see them use a really low rate of interest because typically that's what you end up getting out of those. And on this particular case, if they die prematurely, their heirs would get like almost $500,000 in death benefit. It turned out to be a good deal for them. And there were clients long enough. I got to see that work out in bear fruition. And the plan was beautiful. It worked out great for them, I guess in conclusion. Some of the key points would be get your financial plan first to understand whether you need the benefits or not. When once you have the financial plan then you can go worry about what products do I do I use to help support that. And a lot of times we'll be able to we would be able to show you you don't need that. You don't need the policy, you need to go do something else with it or if you do need it, how big you need as opposed to some commissionable agent just trying to sell you as much as they can sell you. And with all good, you know, they probably had good intentions, right? Thank you guys for watching. You know, I encourage you to click below. Get that insurance download thing I mentioned. You can you could also schedule an appointment with one of our CFPs. If you're an IRA millionaire and you are not sure what direction you need to go with conversions and you just want somebody to help you optimize those, great. If you need also some help with hey, somebody's trying to sell me something, do I need it? They can help answer that question through our planning process. So thanks for watching, like subscribe and new information's coming out all the time on that. We've got tons of tools and resources on our website. Look forward to seeing you around the next time. Take care.