Estate Planning At 65 Using Life Insurance

This is the Truth Network. Welcome to Finishing Well, brought to you by CardinalGuide.com. With certified financial planner, Hans Scheil, bestselling author and financial planner, helping families finish well for over 40 years. On Finishing Well, we'll examine both biblical and practical knowledge to assist families in finishing well, including discussions on managing Social Security, Medicare, IRAs, long-term care, life insurance, investments, and taxes.

Now, let's get started with Finishing Well. Again, to the yoke of slavery. And it's an interesting thing when you talk about an estate plan, it can so easily become an idol. And it's an opportunity when you think about your estate plan to actually kind of decide, you know, gee, what am I going to do, you know, in love for, you know, essentially, you know, for God when I'm gone, with what I've been able to amass as far as that part of my life. And, you know, it's an amazing thing, as I listen to the video that they have on the same subject matter, that again, we'll get to, that's at CardinalGuide.com, that you can hear all the freedom that comes with this investment in life insurance that you may not be aware of all the different things you're going to be able to do.

But interestingly, the thing you're not supposed to do, according to Galatians 5.1, is fall back into the yoke of slavery. In other words, how easily our money can become an idol in so many different ways, and as we begin to push into our relationship to God to see what he would like us to have, you know, be done with our estate is so much fun and so wonderful because there are so many tools to give you freedom, and life insurance truly gives you that, doesn't it, Hans? Well, it does. Yeah, it holds numerous tax advantages that, income tax advantages, where the money, the ultimate death benefit is going to pass tax free to your beneficiaries, and the money is allowed to grow tax deferred. You can access it tax free, and then you sit and you wonder, well, why does the IRS give so many tax advantages to life insurance? I mean, why do they do that?

Why do they favor this over something? And it's because it serves a common good, is that for people to own life insurance, is what are you going to do, start taxing a widow or an orphan that receives a death benefit? I mean, so that's been there since the beginning of the tax code, and it's still there.

And then, you know, there's tremendous tax advantages that are built into there. And we're not just talking about life insurance today. We're talking about IRAs and 401ks. And we're talking about retirement accounts, which most likely, if you're listening to this show, you have one, or you have some. And there's a real danger that you can become a slave to your retirement account. And, you know, or another way to put it is, you know, that we can see people where they're treating their retirement account as an idol. I mean, they're almost sitting and worshiping it, you know, as it grows up in large numbers, and they don't want to touch it. They don't want to pull anything out.

They don't want to pay any taxes. And so what we're talking about today is one of many solutions, using one of many tools that we have to tax-proof your IRA or to turn it into something that's going to be much more useful, either to your heirs or to you yourself, if you want to use this during a lifetime. How does that sound to you, Ravi? Well, yeah. I mean, and it gets back to that idea of what's the purpose of the money. You know, how would God have you invest that in your family, in his church, or, you know, like you said at one point in time, just you and your spouse going out and do the things that you talked about to enjoy your marriage and those kind of things is a real purpose.

And God's all about joy, I can tell you. Well, absolutely. And so I get around to asking everybody that comes through my door at some point, you know, where they've got this money in an IRA, they haven't paid tax on it, they still be in the 401k. And they're quite proud of that.

And I would be too, I'm proud of mine that I, you know, saved and accomplished this. And with the help of tax deferral, it's grown quite substantially. And it's just this blob of money sitting there. And when I shift the conversation, I ask people, so what's this money for?

And then I shut up. And people have a hard time answering that. As you can imagine, I mean, it's just some people, it's easy. I mean, some people just say, Oh, it's for my retirement income. I mean, I, in fact, that's what we're in here to do is to figure out how much of that I can take out next month or the month after I retire. And then, you know, I want to be sure that I still have money when I'm 85.

If I'm still alive, or my wife is. So, you know, that's not a hard question for some people, when they're approaching retirement is really clear to them that they're going to pull money out and live off. But for a lot of people, they don't have that defined. I mean, they're living off of something else, their social security, their other savings, and they just don't want to touch this thing, because they don't want to pay any income tax. And, you know, when I start asking them, like, what's it for? What's the purpose? Why do you have this money? Why did you save this money? What are you going to do with it? And, you know, a lot of times I don't make it that easy for people in the beginning, I really want to hear from them what's it for. And some people will say, oh, it's for my wife, when I die, is she's going to be able to live off of that. Okay. That's a simple answer.

And that's a pretty good one. Some people will say, you know, it's for my children, because that's money that I have sitting there, and they're going to get that. That's really the only money I have to leave them.

So people will come up with an answer. But then we start looking into that, is we start looking at the tax bill that's going to be associated with it. But there's a lot of people, a lot of couples, especially, that are good savers or good misers as well. I mean, there's just a lot of people that they live off that Social Security and they just leave this IRA sitting by itself, and they're only going to take the least that they have to possibly take. And so what I'm showing you today is kind of a parallel strategy or an alternate strategy for Roth conversions. Okay? Yeah, I love that. It's another tool in creating, right, that estate plan.

Well, sure. And so in our example, we have a $250,000 life insurance policy. And there's ways to buy $250,000 worth of life insurance for a lot less money than we're putting into this. But nonetheless, this is a 65-year-old male. He's a standard risk. He's not getting the special preferred rates, nor is he paying extra because of his health conditions. He's just at standard rates where most people fall and a non-smoker.

Okay? Right. This person has an IRA north of $500,000. And he really doesn't need it to create an income and to live off of.

He's not even retired yet. And when he is retired, he doesn't really need it to live off of. And so we're just showing an example of, because he was interested in Roth conversions, and that's what we end up doing for a lot of people is taking a piece of their IRA every year and converting it to a Roth and paying the tax now. Perhaps out of other money, perhaps out of the IRA money, but the resulting money sitting in the Roth is never going to be taxed ever again. So they can access it during their lifetime for tax-free income. They can let it grow tax-free, and then they pass it on to their children or their spouse, and it's going to be tax-free to them.

So it's turning, a Roth conversion is turning IRA money that's taxable into tax-free. And that's pretty attractive to people until I show them the tax bill. And this has got the same tax bill with it.

So when I talk about an alternative, what I'm talking about here is when we use a Roth alternative life insurance strategy, what we're going to do is we're going to start with an amount of money that we want to stuff into this policy as quickly as we can. And what I mean by stuffing it is if we put $1 more in any given year into this policy, or let's say $100 more, we would violate some IRS rules. The IRS is only going to let you put so much premium into a quarter of a million dollar life insurance policy on a 65-year-old male. And that number in this example is a little over $27,000 a year for four years. And then in the fifth year, $24,000, which totaling $134,000 over five years. And then this person is not paying any more premiums into this policy. So we're stuffing $134,000 in here. It's accumulating a pretty significant cash value. And the whole goal here is that we're not going to pay any tax out of any money coming out of this policy either as a cash value, a policy loan, a cash value withdrawal, or a death benefit to the heirs. The goal here is to have money transfer or come back to yourself on a tax-free basis.

Okay? Yeah, it's absolutely beautiful because as you talked about, you know, that it creates so much flexibility in so many different ways. And I think as you listen to the rest of the show today, you're going to hear how, as compared to other strategies, it just has unique advantages in flexibility and giving you freedom with your money.

And then not to mention that, you know, for whoever the beneficiary is, it's an instant estate of a substantial value, you know, right when they made, you know, really need it. And so we got to go to a break, but we wanted to remind you, as always, that this show is brought to you by Cardinal Guide, cardinalguide.com, and there you're going to find the seven worries tab. And one of those worries tabs is life insurance, and so, you know, it's a perfect one to have there today.

And there's a wonderful video. Tom and Hans go into great detail of this with all the show notes and examples. It's all there under the life insurance tab of seven worries. Again, cardinalguide.com, and there you're going to find the contact page, how to contact Hans or Tom, as well as Hans' book, The Complete Cardinal Guide to Planning for and Living in Retirement.

And so today's show, Estate Planning at 65 Using Life Insurance, I think you're going to see, like, oh, my goodness, what an opportunity this may be for you to really have some freedom when we come back. Investment Advisory Services offered through Brookstone Capital Management LLC, abbreviated BCM, a registered investment advisor. BCM and Cardinal Advisors are independent of each other.

Insurance products and services are not offered through BCM, but are offered and sold through individually licensed and appointed agents. Cardinal Advisors is not affiliated with or endorsed by the Social Security Administration or any other government agency. Welcome back to Finishing Well with certified financial planner Hans Scheil. Today's show, Estate Planning at 65 Using Life Insurance. And so, you know, this is an amazing opportunity as far as the tools that you guys have in your toolbox, right, Hans?

Oh, it is. And what we're doing here is we're pulling out money out of the IRA and we're paying the tax and we're spreading this out over five years, just in this example. And we're paying about $27,000 a year into this life insurance policy, four or five years, a little bit less than the last year, adding up to $134,000 of premium that we're paying into the policy. And where we're getting this money from is out of the IRA. So we're going to have to withdraw $35,000 to $40,000 out of the IRA each year for five years because we're going to have to pay the tax to net the $27,000, probably closer to $35,000 than $40,000. I'm just giving myself some room there. And we're trying to get this money over into something where they're not going to pay any taxes on this money or the growth ever again.

Now, you got to follow some guidelines to do that, but that's the goal here. And we started here with the $250,000 death benefit and figured out how much money we can stuff in there over five years. And again, in review, the reason we have to do it over five years, we can't put the whole $134,000 in in one year because the IRS would put certain sanctions on a life insurance policy where too much of the premium comes in in the first couple of years. So this is a strategy to have maximum cash value accumulation in a life insurance policy, but it still has the goal of having a death benefit that's going to go tax free to the heirs. And the results here that we're showing is as a projected cash value at the end of 2029, at the end of the fifth policy year of $140,000.

And you can say, well, that doesn't look all that sweet. I put in $134,000 and I've got $140,000 available, but that's ignoring the charges for the life insurance. If this client, the 65-year-old fella had passed away during the five years, then this $250,000 death benefit would have been paid tax free to beneficiaries. So it's huge because I have one of those policies, I can tell you it's like $300 and something dollars a month that that person is not paying by actually stuffing that money and having the investment, et cetera, et cetera. But also the protection for that family member that could be a huge deal for their life, just having that life insurance. And that's for a significant amount of money.

Oh, it is. And then if they leave it there 2034, which is the end of the 10th year or another five years, it's $158,000 projected, 2039 is 15 years after they bought it. The dude's about 80. It's worth $182,000. And 2044, $210,000. And by 2049, I mean this is quite a while after he bought it, he's 90 years old. It's worth $252,000 and the life insurance has grown up over $300,000 because when the cash value starts to approach the life insurance or death benefit amount, the death benefit automatically grows to keep it tax compliant. And so that's what a lot of people do with these policies is they just leave them sit there and then they pass away and it's all going to go tax free to the heirs.

But I'm going to talk about some other things you can do with this. Namely, after the fifth year, you can make what's called a net zero loan. So you can borrow any amount up to the $140,000 and you can pay 0% interest on the loan. Now you're going to get 0% growth on the cash value that you borrowed. But you can have access to your own money, call it a loan, but your net cost is zero. That's about as far as I'll go with it on the phone.

We can talk about it in person. There's some disclosures there. And I actually did this when I bought a policy similar to this, much larger than this back in my earning years 20 years ago or so. And when I opened this business, I borrowed a substantial amount of money at 0% interest from my life insurance, from my wife's life insurance. And then I've since paid it back. And so all that money is back in the life insurance. And I could borrow it again if I wanted to. So it has great liquidity and access to the money during your lifetime. And unlike a Roth IRA, once you pull money out of a Roth IRA tax free, you can't put it back.

With this you can. And then you've got the life insurance burning all the time. If you pass away, this thing's going to pay a quarter of a million dollars to your heirs tax free. Or that could be the church, because you could designate a piece of this or all of it to the church for admissions. It could be a relative.

It could be really anybody that you want it to be, any cause that you'd want it to be. This policy also has a chronic illness benefit on it, which allows you to access annually 90% of the death benefit for five years or 47 grand a year. If you can't do two of the six activities of daily living. So that'll come to you tax free, because it's like long term care insurance. It's not actually long term care insurance, but it serves the same purpose. I mean, I just keep rattling off benefits.

How about reacting to this a little bit, Robbie? Yeah, well, you know, one of the things that you described in the video, which I also thought was outstanding, just to give you an idea of the flexibility if you have this sitting there, right? And you realize that, wow, this is a wonderful thing for this beneficiary and you've got all this stuff going on. But at the same token, you had wanted to downsize and you found the perfect house that you wanted to go ahead and buy, but you didn't want to finance it or anything since you had all this money sitting in this life insurance account. So you just took an interest free, tax free loan, right? And were able to pay cash for this house at the same time you had the other one sitting there that you were able to hold it on the market for another six months.

And it was just the flexibility. And when I heard that, I just thought, you know, how cool is it that you're truly using your own money rather than it sitting in an account somewhere where you don't have access to it and you're having to make other decisions. This is just freedom that it gives you to totally utilize what your assets are.

It does. And all of this has been tested by the IRS, by the life insurance industry for years. And, you know, they keep talking about trying to push some change where they're going to tax life insurance differently, but it hadn't happened yet. And I mean, when I say keep talking, I've been in the business 48 years, 49 this summer. And I started hearing about that when I first got in the business back in the 70s.

And I've been hearing about it and it just hasn't changed. They modify some of these rules and all that, but life insurance, they want to protect, the government wants to protect the tax free nature of it or the tax benefits just because it serves a common societal good. And this is clearly taking advantage of that. And I have to laugh a lot when I hear people giving bad editorials on life insurance because something I've observed is people with wealth, something I've observed about them over the years is they all have lots of life insurance. I mean, as the people with money are buying this stuff, there's got to be something good about there.

So, anyhow. And so, you know, when you just look at all the advantages of this stuff, one is it can, you know, it can give a tax free death benefit to your heirs. It can provide some long term care insurance or a benefit like long term care. It can provide a bank of money with liquidity that you can borrow at 0% interest.

We could turn that cash value into an income through loans that's tax free. It just serves a lot of purposes. Yeah, not to mention the biggest of all which, you know, was the original idea is it's life insurance for that beneficiary, right? And it creates this immediate estate that sometimes you don't want all messed up in other estates, right? Like that niece or that nephew that you don't want everybody else to know you left this person money.

Well, when you got a beneficiary like that, right, Hans? It just goes straight to them and nobody else knows the difference. It's just a secret. It's behind closed doors.

You know, it serves. I mean, the reality is most of this goes to either widows or widowers or to the adult children that they're passing or to a charitable beneficiary like the church or mixed around a combination of all of those. And don't get stuck on the amount. I mean, we can create the same scenario with $100,000 policy and, you know, for a person about this age with, you know, throwing $10,000 a year that we're pulling out of the IRA for five years. So this can be done with a small life insurance is $100,000. We've sold these in the millions, you know, where people buy a million or two. There's no limit on the amount of life insurance that you can buy. And they don't really care where you're getting the money, whether it's coming out of an IRA or it's coming out of some other asset.

There's no limit on the amount of life insurance that you can buy. And we can really start with the amount of money that you want to stuff into this thing and then we'll come up with the minimum amount of life insurance that you need to buy to make the whole thing work. So we've got a lot of directions we can go with this.

Yeah. And unfortunately, we run out of time again before we ran out of show. We want to remind you, of course, this show is brought to you by cardinalguide.com. If you go to cardinalguide.com, you're going to find the Seven Worries tab and at the Seven Worries tab, today's show is under life insurance. And there is a wonderful video along these same lines that Hans and Tom did with a board that you can see kind of how these numbers work and see kind of how it may fit into one of the many tools that you might use in your financial planning and your estate planning and those kind of things.

And then, of course, there at cardinalguide.com is to contact Hans or Tom Page and time the complete cardinal guide to planning for living in retirement. So again, great show, Hans. Thank you.

Thank you and God bless you. The opinions expressed by Hans Scheil and guests on this show are their own and do not reflect the opinions of this radio station. All statements and opinions expressed are based upon information considered reliable, although it should not be relied upon as such.

Any statements or opinions are subject to change without notice. Investments involve risk and unless otherwise stated are not guaranteed. Past performance cannot be used as an indicator to determine future results. Any strategies mentioned may not be suitable for everyone. Information expressed does not take into account your specific situation or objectives and is not intended as recommendations appropriate for you. Before acting on any information mentioned, please consult with a qualified tax or investment advisor to determine if it's suitable for your specific situation.

Finishing Whale is designed to provide accurate and authoritative information with regard to the subject covered. Investment advisory services offered through Brookstone Capital Management LLC, abbreviated BCM, a registered investment advisor. BCM and Cardinal Advisors are independent of each other.

Insurance products and services are not offered through BCM but are offered and sold through individually licensed and appointed agents. Cardinal Advisors is not affiliated with or endorsed by the Social Security Administration or any other government agency. We hope you enjoyed Finishing Whale 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 Whale radio show on the website and send us a word. Once again, that's CardinalGuide.com. CardinalGuide.com. This is the Truth Network.