IRA Money Used For a Hybrid Long Term Care Life Insurance Policy

Hey, this is Mike Zwick from If Not For God Podcast, our show.

Stories of hopelessness turned into hope. Your chosen Truth Network Podcast is starting in just seconds. Enjoy it.

Share it. But most of all, thank you for listening and for choosing the Truth Podcast Network. security, Medicare, IRAs, long-term care, life insurance, investments, and taxes. Now let's get started with Finishing Well. Finishing Well is a general discussion and education of the issues facing retirees. CardinalGuide.com, Cardinal Advisors, and Hans Schile CFP sell insurance. This show does not offer investment products or investment advice. Welcome to Finishing Well, a certified financial planner, Hans Schile.

We're talking about IRA money used for a hybrid long-term care life insurance policy. That's a lot of words, but Hans, we're covering a lot of ground with one show, right? We are. And so in this idea of counsel that we're going to share with you today, you know, one of the neat things that we get as Christians is we get the wonderful counselor. Like we know that we've heard it in Handel's Messiah that Jesus is a wonderful, wonderful counselor.

And so where does he get that? Well, he gets it from the anointing that he got from the Holy Spirit. And if you look at Isaiah chapter 11, actually people know me well, know this is one of my favorite set of verses where we see how Jesus actually is this wonderful counselor, because we see his anointing, the anointing he gets from the Holy Spirit in the seven spirits that are described there.

And those seven spirits are wisdom and understanding and counsel and might, knowledge, fear of the Lord and delight in the fear of the Lord. So, you know, when it comes to any place that we're trying to get some help and we need a wonderful counselor, wouldn't it be good if he had all those attributes, like the ultimate fiduciary, right, Hans? So to have wisdom and understanding, but also I love the word counsel. And the word counsel in Hebrew has to do with someone who can see what the right path is based on your needs, right?

Because all of us have different giftings. You know, Robbie's a lot different than Hans in the way that God built me. And so he knows what the right path for me was not the car business, by the way. And so he knows what the right path is for you as well.

But the beauty is, is we get counselors in our life, especially if they are like Hans, where they're looking at your entire situation, they have all the information, then oh my goodness, the wisdom and understanding in putting you on the right track based on the resources that you have available give you so many more options and so much more that you can do. And today's show is very much along these lines is what we're talking about is, you know, you have an IRA situation which has a tax liability to it, but Hans, I'll let you take it from there. Yeah, well, and so we just did this YouTube video, which we'll email out to everybody.

We did it on just what you said, it's a mouthful. We're talking about using IRA money to fund with a single premium, a piece of a person's IRA to get a long-term care policy for two people in this example, a husband and wife. And I decided to do the show because it just hit me when we were presenting this and the guy's buying it and this guy has been a good saver. And where I really got him in a lot and asking him a tough question, which I ask a lot of people, so be ready for this if you come in and do financial planning with me. When it comes to the IRA, what's it for?

And you know, that sounds like a simple question people could just say for me. But you know, you say most of these same people with their IRA money, they're saying, well, I don't want to pay any taxes. And they're thinking that every time they pull money out of there, they're going to have to pay taxes. So they put it off as long as they can. And then they get to age 72 and they only take the minimum and they grumble about it typically.

And so, you know, I could go over all that in a different, I do go over all that in a different show. But what I want to ask people is, okay, so what's this money for? Why do you have this $500,000 or $800,000 that you've accumulated through 401k? And all we've talked about is taxes to this point and postponing any withdrawals till you have to.

So what's the money ultimately for? And people have a hard time with that. Yeah, because at some point in time, right, they, it almost becomes an idol in that they're just watching it grow and we don't want to mess with it, you know, cause I've watched it grow to this for so long, you know, that we've lost sight of like, like Peter, you know, we, we got out of the boat and we forgot that we better keep our eyes on Jesus or we're going to sink.

Well, yeah. So, so, so like I said, people get so focused on, you know, I mean, I can answer the question for them. It's for security and retirement. I mean, it's like, as long as I know that's there and I could go get it, sure, I'd have to pay taxes, but I can, I could go get it if I needed to. So I feel better going into my retirement, even though I probably won't go get it unless they make me go get it, you know, and it's just, people are talking in circles. And, um, when I really put pressure on them, but I don't, don't let them off easy when I've got these big IRA 401k balances and I'm looking at all their other money and their income and their social security and their spending, cause usually people that have big balances in their 401ks are not big spenders, cause spenders don't usually make great savers. And so, or great savers are usually very slow to spend.

So those are the kind of people that can live off their social security and their other money for a long time. And so it's real key. I got to know what this is for. And then, you know, at some point I turn this into a multiple choice question, you know, and I'll go to one of the endings so you could say it's for your kids. You know, if I have a single person or if it's for the spouse, you know, the spouse and a married couple, they say, Oh, this is for my wife or this is for my husband.

Okay. Um, or the kids, I mean, or sometimes we like to add in the church and then we teach them how to do QCDs, but a lot of times we have to turn this into a multiple question, but it's gotta be for some combination of those people or those organizations or what else would it be for? It doesn't it doesn't exist to pay taxes. It exists to pay you a net amount that you're going to spend on something or your kids are going to spend it on something. And so it really, through hard questions, we get to a point with people that we start making them allocate their 401k money.

They got to do something with it. And this is when I start to do my work and what I love for them to bring up instead of me, you know, you know what it's for is, is if I get where I can't take care of myself, if I have big medical bills or a lot of people won't hit it right square on the head. But what they're really saying is if I have to go to one of those rest homes or I've got to do something, then that's right there. And they'll use this money to take care of me.

Okay. And that's what I'm looking for is when somebody says that. And then 25 years ago, I would pull out of my bag, a long-term care insurance policy. And I'd start showing them how they can spend three, 400 bucks a month for a couple, probably more now to get them some long-term care insurance. But that happens because it's smarter to pay for this with long-term care insurance than it is just straight out of your retirement money.

And so the point of the show today is if somebody has a large IRA or a large 401k that can be moved into an IRA, tax-free or tax-deferred, and then what we're going to show them how to do is take a portion of that money, and it doesn't need to be as much as these people did, and just roll it over into another IRA that is specifically set up to buy a long-term care insurance policy. And that's what it really amounts to. But it's also a hybrid, right? What's that? It's also a hybrid, so if they don't need it, it becomes life insurance, right?

Well, it does. And so we're fundamentally taking, like in this example, $200,000 and moving it to the insurance company, and it's still there, same amount, it's still in an IRA, there's not a tax liability, and then out of that $200,000, it pays the premium at the tune of $22,000 a year for 10 years and empties the IRA so that you have this $290,000 life insurance policy. So first and foremost, if they never use it for long-term care for this couple, when the second one of them dies, there's going to be $290,000 that's going to go tax-free to their beneficiaries.

So at the very minimum, they've taken money that was taxable and that's going to pass to their heirs with a tax bill and turned it into something larger that's going to go to their heirs tax-free. And then what we've also done with this is we've created a long-term care fund that is twice the size of the life insurance. So if we're going to call the life insurance $300,000, it's pretty close, then the long-term care benefit is $600,000. So the first $300,000 that they use to the tune of about $9,000 a month, so $9,000 every month to use up $300,000, that's their life insurance. So if they use up that $300,000 for long-term care during their lifetime, then there is going to be no life insurance. When that's used up, now they get into the insurance company's pocket and they're using up the $300,000 of extension rider. All of this is funded with an initial deposit of 200 grand.

And they can mix and match. The husband could use all $600,000 worth. The wife could use all $600,000 worth. The husband could use up $60,000.

The wife used up $20,000. And then they'd still pay a life insurance benefit of $240,000 or $220,000. So it's a very flexible, it's just a planned arrangement over a person's lifetime.

Now in this case, the people were 59 and 57, or almost 60 and 57. Well, before we get into all those details, Hans, I hate we got to go to a break, but we want to remind our listeners that this show is brought to you by CardinalGuide.com. And at Cardinal Guide is where their website is. And you can click on the Seven Worries tab, find out more about long-term care and those kinds of things, as well as email Hans or contact them if you want a custom quote for your particular situation with what you need. Again, this video that he's talking about is on Cardinal Advisors at YouTube, which is Cardinal Advisors. Obviously, you can subscribe to that and get all their videos. They put out one every week. So when we come back, we're going to have more on this idea of taking IRA money to create long-term care in a hybrid.

So we'll be right back. Hans and I would love to take our show on the road to your church, Sunday school, Christian or civic room. Here's a chance for you to advance the kingdom through financial resources by leveraging Hans' expertise in qualified charitable contributions, veterans aid and attendance, IRAs, social security, Medicare, and long-term care. Just go to CardinalGuide.com and contact Hans to schedule a live recording of Finishing Well at your church, Sunday school, Christian or civic group. Contact Hans at CardinalGuide.com.

That's CardinalGuide.com. Welcome back to Finishing Well, a certified financial planner, Hans Scheil. Of course, this show is brought to you by Cardinal Guide, as we always describe in Hans' book, The Complete Cardinal Guide to Planning for and Living in Retirement, where he goes into some of this. But in today's show, we're really going places where we hadn't gone in the book or in shows before, talking about a very specific plan of using IRA money to create a long-term care life insurance hybrid, which when we started, we're using financial numbers, right, Hans, from somebody who was 59. Yeah, this guy's 59, his wife's 57, he's almost 60. So he's older than that 59 and a half threshold, where he can start, because you have to beat that to buy this policy.

We have other ways to do this if you're younger than that. And he's probably on the youngest side of a lot of our clients that are coming in, they're more early 60s, mid 60s. And these numbers that I'm talking about are going to be relative not only to his age, and they're both their ages, but they're also going to be relative to the size of their IRA. I mean, if he only had $350,000 in his IRA, I would not be recommending that he put $200,000 of it in this policy. He's having a tough time answering, what am I going to do with this IRA money?

He's hired me to help him with that, but I need him to answer the question, what's it for? And so, you know, he definitely wants long-term care insurance. And he was considering just buying a regular long-term care policy. But until we got him in this idea, and I just decided to do a show about it, so we took about 20% of his IRA money, or $200,000, we didn't spend it, we just moved it into an IRA, annuity, and this annuity shoots off a 10-year premium of $22,000 a year.

Immediately when you sign up, you move the $200,000 out of your IRA into another IRA, which is actually an annuity that's going to be sent out at this $2,200, but the $200 of that is actually the interest coming on the annuity. And then is he paying tax on that $2,200 that's coming out every year? It's $22,000.

I mean, sorry, $22,000. Yeah, he's paying tax. That's showing his income, but we're taking $200,000 and spreading it over 10 years, which is part of a whole program we're doing with his IRA, but the answer to that is yes.

So that'll create a little bit more expense that we'll have to figure out how to pay that. But what it's really accomplishing is it's turning $200,000 of taxable money, either to him or his beneficiaries, into either $290,000, or let's call it $300,000 of life insurance, which is tax-free, or $600,000 worth of long-term care coverage that's going to come to them tax-free. And it's part of a larger program of slowly moving this IRA money that's pre-taxed into an account that the taxes have already been paid so that he can freely spend it in retirement. And we're doing that through Roth conversions. So we're going to convert about $800,000 of this million for him, in his IRA, to something that's after-tax. And it's really going to be $600,000 of Roth conversions and $200,000 of hybrid life long-term care. So by the time this dude is 69 or 70 years old, he's going to have, at least from a deposit standpoint, $800,000 of after-tax money, either in a Roth or in this life insurance, and he's going to still have about $200,000 in his IRA where he hadn't paid tax yet. Yeah, I mean, that's a beautiful—because again, as you always talk about, the idea is if you're just getting your Social Security, there's no tax on that in and of itself. So your other income is really greatly affected.

And so if you can make these kind of conversions of your IRA, you're not only making it available for whatever you need in retirement, but again, for whatever beneficiaries you have or the recipients of it, that they too are going to not have a big tax liability to go, because a million dollars has a big tax liability if you just ran up into 70-something with that, right? Well, there is. And he was really focused on that. This guy's all about paying no taxes, but nobody had really ever asked him, so after you pay the taxes on this, whatever way you're going to do it, what's the money for? He was having trouble answering that. At the same time, he was communicating—his mother-in-law is in a facility right now. They're handling her money, and they're paying out a lot for that. And so he was already a very solid buy some long-term care insurance.

And when I showed him how to do that as part of his plan with his IRA, he was just all over it. Right. And one of the—maybe I'm jumping ahead, but it was so exciting to me when you brought it up that, wow, for not just a whole lot more, you can get unlimited long-term care, because the one you're talking about, you know, you're doing $9,000 essentially a month for, was it six years? Well, what it was, it's $22,000—excuse me, the benefit you're talking about. Right.

It's $9,000 a month for six and a half years. Right. And that's for the two people, both the husband and the wife. Right.

And they can mix and match it. And then for an additional premium of about $6,000 a year for 10 years, or if he'd deposit $260,000 into the IRA right from the beginning, the IRA annuity, then his policy would still be $300,000 of life insurance. That doesn't change if they don't use it for long-term care. But then instead of $600,000 cap for long-term care, it's unlimited, or lifetime. So—and he's—he hasn't bought this yet.

He's very seriously considering that option, which I threw in at the end to him. Yeah, because, I mean, oh my goodness. Yeah, because you're talking about two different people that, you know, possibly long-term care. And, wow, to have that unlimited thing is like you just—that would be one worry out the window completely, right?

You never have to worry about that one. Well, yeah. And, you know, people are going to be more inclined to use idle IRA money to plan for something for the future than if we were sitting down talking to this guy about taking money that's in a brokerage account or a savings account. And frankly, I don't think he has that much laying around that he would actually do this. I think that he would probably buy this thing with just pay by the month or pay by the year and just buy traditional long-term care. Now, I will tell you a place where I will use the lion's share of an IRA. If I got somebody who's like 75, 78 years old, and they're kind of grumbling about minimum distributions anyhow, so it means they're not spending their IRA, and maybe they've only got in their IRA 250,000 left, and maybe they're single or they got 200,000 left, they can take that whole 200,000, roll it into the same type of policy. It only covers one person, and then it'll distribute it over 10 years. So it'll meet all the minimum distributions, and it's effectively providing a long-term care benefit for them. Or if they pass away without needing long-term care much, it'll create a big life insurance benefit for their kids. So when somebody's in the mid to late 70s or even early 70s and they don't really have a purpose for the IRA other than giving it to the kids when they die, and they're keeping it and they're worried about long-term care, we can take the whole thing and turn it into a long-term care life insurance policy. Right, which is genius when you think about it, because if they just kept going with minimum distributions when their heirs got that money, it was all going to be taxable, and it wouldn't be 300,000, it would be 200,000, or if it was that, right?

Well, yeah. And these things have easier underwriting than regular long-term care insurance. In other words, when you get somebody in their 70s, and you've got a number of ailments, you can get turned down for regular long-term care insurance.

And they can certainly turn you down for this deal if you think serious enough. But there's a lot of people that are managing chronic illnesses pretty well in their 70s, and the life insurance company, if you're sticking a glob of money in there, they're going to be a little more considerate in the underwriting. So we can get a lot of people insured and stuff where we couldn't get them on regular long-term care.

Yeah, and again, the beauty of it is, you know, you have both the benefit of life insurance in case you never use it, and then you have the benefit of creating taxable money into non-taxable money, whether you're using it on your own or using it for the long-term care. And again, it's important to remember that a lot of times, you know, we talked about facilities, but a lot of times, long-term care is in your house, right? Who wants to go to a facility if we can still get the care at our house? Well sure, this just buys private care.

You know, I want to add something. This doesn't only work with IRA money. It's actually an accommodation for IRA money. If you just have regular savings, and you've got quite a bit of that, and it's idle, and you're not earning a lot, and it's really there to pass on to your kids, and it's your safety net for long-term care, we can take it. I mean, we can do a lot of work with a hundred thousand dollars in one of these policies, especially if you're willing to pay a little ongoing premium for the extension rider. You know, safe to say that for people in their 70s, we can take some of their savings and put it toward this and get them long-term care, and then if they don't use the long-term care, it pays off as a life insurance benefit after they die.

People in their 60s is going to require a little more money because we need to write bigger benefits because they're not going to use it for several years, and then added to that, you know, we're covering two people, and we've got this pre-tax IRA 401k thing going on. So if you haven't dealt with this, I don't care what your age is, I've got something for you. Wow, and as you can tell, there's a lot more to be understood about this subject, and that's why they, first of all, have the video there at Cardinal Advisors on YouTube.

You can watch the whole thing. Tom and Hans take you right through a lot of the numbers right there on the screen. It's absolutely beautiful, as well as, of course, his website, cardinalguide.com, where you can click on the Seven Worries tab, find out more about this, or get Hans' book, The Complete Cardinal Guide to Planning for and Living in Retirement. And so again, thank you, Hans.

It's been fun. Yeah, thank you, and God bless. Finishing well is a general discussion and education of the issues facing retirees. cardinalguide.com, Cardinal Advisors, and Hans Schleil CFP sell insurance.

This show does not offer investment products or investment advice. We hope you enjoyed Finishing Well, brought to you by cardinalguide.com. Visit cardinalguide.com for free downloads of this show or previous shows on topics such as social security, Medicare, IRAs, long-term care, life insurance, investments, and taxes, as well as Hans' best-selling book, The Complete Cardinal Guide to Planning for and Living in Retirement, and the workbook. Once again, for dozens of free resources, past shows, or to get Hans' book, go to cardinalguide.com. If you have a question, comment, or suggestion for future shows, click on the Finishing Well radio show on the website and send us a word. Once again, that's cardinalguide.com, cardinalguide.com. This is the Truth Network.