The Benefits of Combined Strategies 

Inherited Life Insurance Is Not Taxable To Your Beneficiary

And is a Great Solution to the SECURE Act.

by James Lange, CPA/Attorney

In the real world, the best response to defend your family from the dreaded SECURE Act does not merely involve one strategy or one “answer.” We almost always recommend a combination of strategies to get the best result for you and your family.

One advantage that we have is that we look at things from a strategic standpoint, a legal standpoint, an investment standpoint, and a tax standpoint. We have CPAs, estate attorneys, wealth advisors all working as a multi-disciplined unified team on the client’s behalf.

It is also much better for a client who often gets conflicting advice from his CPA and his attorney, wealth advisor, etc. and must decide who to follow.

Roth IRA conversions, Lange’s Cascading Beneficiary Plan (LCBP), life insurance, low-cost enhanced index funds, asset location, and other strategies can be used individually in your retirement and estate plan to benefit you and your heirs. But by combining two or more of these strategies, you can create even greater wealth not only for you and your spouse but for your entire family.

The practice of combining different strategies forms the cornerstone for most of our client recommendations. We have long been fans of combining Roth IRA conversions, optimizing Social Security strategies, investing in low-cost index funds, gifting, and using our favorite estate plan, Lange’s Cascading Beneficiary Plan, for many, if not most, married couples who have children from only that marriage (we have other solutions for blended families and same-sex couples). We also combine those strategies with low-cost index/ enhanced index investments using asset location techniques.

Combine Roth IRA Conversions and Life Insurance

The below graph literally blew me away when I saw it. It seemed too good to be true. The United States has enacted laws that provide enormous rewards for implementing tax-savvy strategies. We examined the combined benefits of Roth IRA conversions and life insurance, two examples of paying taxes now in return for tax-free growth. The graph quantifies the benefits of combining Roth IRA conversions (done over several years) and life insurance.

Assumptions for Graph:

Planning parents do five $100,000 Roth conversions.

Both parents die at age 85.

The child inherits the balance of all accounts at age 45.

The child lost his savings and retirement plan in divorce.

The unmarried child retires at age 60.

The unmarried child collects $15,000 in Social Security at age 62, COLAs at 3.0%.

The unmarried child spends $120,000 annually.

Numbers are in actual dollars.

Rate of return 7%.

Rate of inflation 3.5%.

This graph compares two families with identical resources. One family makes a series of Roth IRA conversions and buys life insurance. The other family neither makes any Roth IRA conversions nor buys life insurance. The graph shows the trajectory of wealth over the life of the child. The child of the family who made the optimal series of Roth IRA conversions and bought life insurance has $7 million when he is in his eighties and the child of the family that neither bought life insurance nor did Roth IRA conversions is broke at the same point in time.

Though in this example, we combine life insurance and Roth IRA conversions, we usually arrive at the best solution by combining a number of different strategies after “running the numbers.” One of the reasons that running the numbers is so hard is that the person running the numbers has to decide which strategies to run and how to combine different strategies. Then even if you know which strategies you are going to combine, the next questions are, “How much of each? How big of a Roth IRA conversion should you make and when?” The same with life insurance and many of these calculations are synergistic meaning that what you do with one variable will have an impact on a different variable, but potentially using both strategies in concert will confer more advantages than using both strategies separately.

The other thing I should mention is that the insurance product in this analysis is a Second-to-Die policy. We are currently looking at using First-to-Die policies and then a Roth IRA conversion after the first death.

The combination of Roth IRA conversions and life insurance is a powerful combination. Is it time for your life insurance check-up? Inherited life insurance is not taxable to your beneficiary and it is a great solution to the SECURE Act. We are available to consult with you regarding your life insurance planning. Simply call Alice at 412-521-2732 if you would like to schedule a Zoom consultation. 

As you can see, there is an enormous difference between optimal and mediocre planning. But this is a huge opportunity to protect yourselves and your heirs and give them a lifetime of financial security. Please consider a combination of strategies to have the biggest impact on yourself and your family.