Help!!! What Do I Do with Life Insurance Money?

[peachykeen]

I've got a client scenario that I need help with.

My client is 37 years old. Her husband passed away leaving her some insurance money. She wants to use some now, then again in 5 yrs and 10 yrs. (She'd like to get a monthly payment for her son's private schooling. He is only 4 yrs old.) Are there any products out there that would give her an income rider and let her start using it in 5 years? I'm not completely sure on the annuity rules and distributions under 59 1/2.

My IMO mentioned doing a 72t .... would that work?

Should I be looking at a life insurance product or an annuity? All comments and advise appreciated!!

 

[DHK]

72q is the proper term because you're talking about life insurance proceeds that would fund a non-qualified annuity (non-qualified meaning that it isn't being funded with qualified retirement money, like a 401k, etc.)

The problem with a 72t or q strategy is that the money HAS to stretch for 5 years OR until they reach 59 1/2... whichever is longer. If it doesn't, you will owe the IRS retroactive 10% early withdrawal penalties back to the first distribution. Plus, those payments would be rather small to make them stretch over 20+ years.

(You might need to fire your IMO for a reckless recommendation.)

I would be looking at some immediate annuity strategies mixed with some deferred income strategies. Income from immediate annuities are exempt from the 10% income penalty and primarily distribute principal along with a small amount of interest payment and you can set it up for a given period of time - say 5 years or so.

Here's one idea:
- You fund an immediate annuity for 5 years for income right now.
- You fund 2 more deferred annuities for 5 and 10 years.
- When the 5-year deferred annuity matures, you then fund an immediate annuity (and get paid again because only an immediate annuity is exempt from the 10% penalty).
- When the 10-year deferred annuity matures, you then fund an immediate annuity (and get paid again... for the same reason as before).


If you need help structuring this for your client, I would contact Tahoe Ray here on the forum. He can help you with recommended contracts and set this up in the proper way based on your client's needs without a 72t or q strategy.

 

[Golfnut2112]

Annuities are not in the best interest for your client in this case. There is no way she is going to accomplish what she is trying to do without adverse tax consequences? This is a typical type of problem I see all the time with agents that just sell annuities and are not securities licensed, they try to fit a square peg into a circle. My recommendation is get someone who is securities licensed to handle the case for you. If you decide to go the annuity route I would show your idea to her accountant for a second opinion.

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72q is the proper term because you're talking about life insurance proceeds that would fund a non-qualified annuity (non-qualified meaning that it isn't being funded with qualified retirement money, like a 401k, etc.)

The problem with a 72t or q strategy is that the money HAS to stretch for 5 years OR until they reach 59 1/2... whichever is longer. If it doesn't, you will owe the IRS retroactive 10% early withdrawal penalties back to the first distribution. Plus, those payments would be rather small to make them stretch over 20+ years.

(You might need to fire your IMO for a reckless recommendation.)

I would be looking at some immediate annuity strategies mixed with some deferred income strategies. Income from immediate annuities are exempt from the 10% income penalty and primarily distribute principal along with a small amount of interest payment and you can set it up for a given period of time - say 5 years or so.

Here's one idea:
- You fund an immediate annuity for 5 years for income right now.
- You fund 2 more deferred annuities for 5 and 10 years.
- When the 5-year deferred annuity matures, you then fund an immediate annuity (and get paid again because only an immediate annuity is exempt from the 10% penalty).
- When the 10-year deferred annuity matures, you then fund an immediate annuity (and get paid again... for the same reason as before).


If you need help structuring this for your client, I would contact Tahoe Ray here on the forum. He can help you with recommended contracts and set this up in the proper way based on your client's needs without a 72t or q strategy.

An exchange from a deferred annuity to an immediate annuity will not qualify as an immediate annuity for the purpose of trying to avoid the tax penalty.

 

[scagnt83]

You client needs a financial advisor who can put together a diversified portfolio for her.

Annuities are not suitable for her situation AT ALL!!!!!

Selling her an annuity would be an E&O time bomb.... not to mention a terrible thing to do to a grieving widow.

Find a local advisor who you trust and refer her to them.

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(You might need to fire your IMO for a reckless recommendation.)

I cant agree with the whole post... no way this person should be in any type of an annuity... an immediate annuity does not negate the 10% penalty she would face.

But the line quoted I totally agree with!! FIRE YOUR IMO they have no clue what they are doing.

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Annuities are not in the best interest for your client in this case. There is no way she is going to accomplish what she is trying to do without adverse tax consequences? This is a typical type of problem I see all the time with agents that just sell annuities and are not securities licensed, they try to fit a square peg into a circle. My recommendation is get someone who is securities licensed to handle the case for you. If you decide to go the annuity route I would show your idea to her accountant for a second opinion.

----------

An exchange from a deferred annuity to an immediate annuity will not qualify as an immediate annuity for the purpose of trying to avoid the tax penalty.

I couldnt agree more. No way no how should this person be in an annuity of ANY type. Square peg... meet round hole...

 

[DHK]

While annuities might not be the most appropriate (hey, I can concede too), introducing RISK for life insurance proceeds... is not exactly what I would consider a "secure" recommendation.

With non-qualified annuities, at most, you owe 10% penalties and taxes ON THE GROWTH within the annuities before age 59 1/2... but introducing PORTFOLIO RISK to life insurance proceeds???? I'm not sure I would do that. Correction: I would NOT recommend that under most circumstances - especially with having immediate needs.

Unless they want to put a portion away for an investment time frame of 5 years or more, don't invest in securities.

If annuities aren't the place to go, then I would recommend she just put it in the bank. Ladder some CDs and put some in a money market account. Instead of deferred annuities, you can fund an immediate annuity to ensure that monthly income for a period certain.

Don't put life insurance proceeds at risk for a young family that has immediate needs to ensure a lifestyle that the breadwinner wanted to be secured. Been there, done that... and I saw that portfolio evaporate by 30% in 2008.

DON'T DO IT.

 

[scagnt83]

While annuities might not be the most appropriate (hey, I can concede too), introducing RISK for life insurance proceeds... is not exactly what I would consider a "secure" recommendation.

With non-qualified annuities, at most, you owe 10% penalties and taxes ON THE GROWTH within the annuities before age 59 1/2... but introducing PORTFOLIO RISK to life insurance proceeds???? I'm not sure I would do that. Correction: I would NOT recommend that under most circumstances - especially with having immediate needs.

Unless they want to put a portion away for an investment time frame of 5 years or more, don't invest in securities.

If annuities aren't the place to go, then I would recommend she just put it in the bank. Ladder some CDs and put some in a money market account. Instead of deferred annuities, you can fund an immediate annuity to ensure that monthly income for a period certain.

Don't put life insurance proceeds at risk for a young family that has immediate needs to ensure a lifestyle that the breadwinner wanted to be secured. Been there, done that... and I saw that portfolio evaporate by 30% in 2008.

DON'T DO IT.

No way man, not at that age. She is way too young to put it all in the bank and turn it into a sinking fund.

And just because its in Securities, does not mean she is taking on more risk than an annuity. Lets ignore the suitability/tax issues of the annuity since we agree on that.

Short Term Treasuries carry extremely little risk. Even the funds.
For the pending income need she could even do TBills which carry literally zero risk by definition.

And since she likes the idea of steady income to pay for the kids school.... then that screams Bonds or Preferred Stock. Both would create income and have a very low risk for principle loss.

Lots of options to keep it safe. But at just 37, she needs appreciation, especially if she needs the funds to help pay the bills over the next 20 years.

jmho

 

[fmintar1]

While annuities might not be the most appropriate (hey, I can concede too), introducing RISK for life insurance proceeds... is not exactly what I would consider a "secure" recommendation.

With non-qualified annuities, at most, you owe 10% penalties and taxes ON THE GROWTH within the annuities before age 59 1/2... but introducing PORTFOLIO RISK to life insurance proceeds???? I'm not sure I would do that. Correction: I would NOT recommend that under most circumstances - especially with having immediate needs.

Unless they want to put a portion away for an investment time frame of 5 years or more, don't invest in securities.

If annuities aren't the place to go, then I would recommend she just put it in the bank. Ladder some CDs and put some in a money market account. Instead of deferred annuities, you can fund an immediate annuity to ensure that monthly income for a period certain.

Don't put life insurance proceeds at risk for a young family that has immediate needs to ensure a lifestyle that the breadwinner wanted to be secured. Been there, done that... and I saw that portfolio evaporate by 30% in 2008.

DON'T DO IT.

I agree with you completely on the solution. Securities type of account is very risky. I would suggest putting the money in an account where the risk bearer is not the individual. Putting money where there is no risk involved is the best solution.

I would assume IUL is the best savings plan for her. The risk is solely covered by the insurer. But I would also assume that she is no longer young, so I believe IUL is not the best solution either. I have never worked with annuities previously, so I have no say in annuities either. But what I do know is, security account is not an option at all.

So...bump

 

[DHK]

We're not talking about just paying utility bills here. The OP mentioned private school for a 4 year old. And, of course, we don't know the net death benefit proceeds amount in this thread. I can assume a 7-figure death benefit... but that could be presumptuous.

I would say this: Whatever advisor you choose, make sure they have a series 7 &/or 65. Make sure they can't recommend just mutual funds. I had put someone's life insurance proceeds into a portfolio of mutual funds, thinking they were a conservative investment... but it simply didn't turn out that way.

https://www.youtube.com/watch?v=e6I6ZYt9FpU

Laddered bonds, Treasuries, indexed CDs, or even tactical asset management. Tactical asset management will not guarantee against loss, but I'm pretty sure they won't see more than a 10% negative in any given year. (It would only take 11% to recoup losses the next year and that's doable.)

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I would assume IUL is the best savings plan for her. The risk is solely covered by the insurer. But I would also assume that she is no longer young, so I believe IUL is not the best solution either. I have never worked with annuities previously, so I have no say in annuities either. But what I do know is, security account is not an option at all.

So...bump

She's 37, so she's young enough. A portion going into an IUL *might* work... but not for immediate liquidity needs. This would be building another nestegg for herself and a long-term savings plan. If she's working, then definitely. That's her own plan using her own income.

But I wouldn't put life insurance proceeds back into a life insurance product.

 

[scagnt83]

We're not talking about just paying utility bills here. The OP mentioned private school for a 4 year old. And, of course, we don't know the net death benefit proceeds amount in this thread. I can assume a 7-figure death benefit... but that could be presumptuous.

I would say this: Whatever advisor you choose, make sure they have a series 7 &/or 65. Make sure they can't recommend just mutual funds. I had put someone's life insurance proceeds into a portfolio of mutual funds, thinking they were a conservative investment... but it simply didn't turn out that way.

https://www.youtube.com/watch?v=e6I6ZYt9FpU

Laddered bonds, Treasuries, indexed CDs, or even tactical asset management. Tactical asset management will not guarantee against loss, but I'm pretty sure they won't see more than a 10% negative in any given year. (It would only take 11% to recoup losses the next year and that's doable.)

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If she has immediate needs then she needs a mix of liquidity and conservative growth. Obviously its all guess work until seeing the assets and exact needs. But she sounds like a perfect candidate for having at least part of the portfolio in income generating securities. But a bank account or MM or even CDs are going to guarantee that she runs out of money eventually and it is also going to guarantee that her purchasing power is less and less every year.

Anyway, how much you want to bet we are talking about a $100k DB?? LOL

 

[DHK]

A sinking fund is not necessarily bad... as long as they are also saving for their own retirement.

A 25-year paydown would take her all the way to age 62. Combine that with social security benefits for widows and her child... the black-out period... and if she's still working, she could be comfortable to retire at age 62.

It all just depends.

If she's a "looker"... she just might remarry in the next year anyway (but that's rather hard to put that assumption in your notes as part of the investment recommendation for the proceeds).