Slott, Pfau: When and How to Use Annuities and Life Insurance in Client Plans


What do you want to know

  • Ed Slott and Wade Pfau provide their perspective on life insurance and annuities as part of a portfolio.
  • Life insurance is the most flexible and tax-efficient asset to leave to a trust, Slott says.
  • Advisors should consider the client’s lifestyle when choosing an annuity.

What’s better for retirement and estate planning: life insurance or annuities?

In a recent American College of Financial Services webinar, moderator Steve Parrish, Assistant Professor of Advanced Planning, posed this question to Ed Slott, CPA and Head of Ed Slott & Co., and Wade Pfau, Professor of college retirement income. . Here is an excerpt from their responses:

STEVE PARRIS: Ed, as we enter 2022, has the recent increase in life insurance premiums and tighter underwriting standards affected your opinion or is it [life insurance] another excellent RMD alternative?

ED SLOT: Obviously the price is something to assess, but remember for the planners, you need to have a long-term view – not what it costs now, but what you can provide for a family. When I say long-term, not just for retirement, but beyond the estate plan: The plan for the beneficiaries — these are your new clients.

Obviously there are upfront costs, but even with the higher premiums in general, I’ve always been a fan of life insurance because I look long term. …

Now, with the Secure Act, all Congress has done is shoot itself in the foot by eliminating the Expandable IRA. They downgraded IRAs for wealth transfer and estate planning vehicles and improved things like life insurance. … All they did was inspire us to do the best planning we should have done all along.

But someone said an IRA trust probably won’t work after the Secure Act. That’s true, because most of them will be subject to this 10-year rule. And existing trusts need to be reviewed because under the 10-year rule there is no more [required minimum distributions] after death. It’s just a big RMD.

Well, if all of that goes into the trust at the end of the 10 years, you could have the exact opposite of what the client wanted: post-death control and low taxes for their beneficiaries. Now you have $5 million paid out at the end of 10 years.

Life insurance is a great alternative to this. [It’s a] better option, similar to the Roth conversion, to remove that growing IRA, pay some tax now at low rates, and use it, if the client wants that control after death, to buy life insurance and to leave [that] to trust.

Life insurance is the most flexible and tax-efficient asset to bequeath to a trust. You don’t have those tricky RMD rules. You don’t have all those tricky and very complex IRA trust rules.

And best of all, you don’t have income tax on life insurance, unlike IRAs. [And it] can be arranged outside, or excluded from the domain. IRAs, even Roth IRAs, are always included in the estate.


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