How to Create Income From Life Insurance Policies – Episode 374

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[00:02] Welcome to the Prosperity Podcast. We’re talking about getting income from your policies when you’re in your 90s. And if you don’t think that you’ll make it to your 90s, I think Kim has some surprising information for you as well. Aha. So let’s start with a like Time magazine article of 10 or maybe even 12 years ago that has a baby on it and you can Google this and find it. And the headline is this baby will live to 140. It might even be like 142 or some more specific number. Doesn’t matter. It’s a lot longer than 90. It’s a lot longer than 100. It’s a lot longer than 110. It sure is. And everyone’s getting healthier in most cases. And I think the killer is the television. And it seems like a lot of people that are retiring are saying,

[00:59] you know what? Kick the TV and let’s go out and do something. So let’s talk about what happens in your 90s. And for those people that still need money. Yes. Yes. Yes. So assuming that you actually chose to stop working, which again, I know that sounds really weird, but I’ve got 80 plus year olds in my family and my extended family that are still working. You know, maybe it’s only three, four days a week or it’s a couple hours a day. I saw a 96 year old quote financial planner the other day that is still helping people with their finances from his assisted living facility. You know, probably light care, but still I thought way to go. Oh, that is great fun. So yes, this is a listener question and it is how specifically

[01:53] from the life insurance policies, I mean, we could talk about a whole bunch of things, but specifically from the life insurance policies, how do I create income? And so I would love to share that answer because there’s a variety of ways and they’re all valuable. But my most favorite, especially because when you’re in your 90s, even if you have tossed the TV, which I cannot recommend that enough, even if you still are maybe fussing with your real estate, even if you feel like you’re out and about, or even if you are still working a little bit, we might want to build in a whole bunch of certainty at that stage of the game. I’m thinking 90s equals certainty. Does that work for you? That does work for me.

[02:42] Yeah. People at that age are going to want to make sure that things happen. And so one of the super cool things that you can do with the life insurance policy is convert it to a single premium immediate annuity. So these are known as SPIAs in the trade, single premium immediate annuity, which does then destroy the death benefit. It makes the death benefit go away. And so you want to make this decision carefully. And this is of course not going to work for everybody. But if you feel like your next generation has already got it solved, or you have 20 some policies and you’re doing this with two or three of them, or for whatever reason, you just don’t care about the death benefit anymore, you can convert essentially the cash value to a single premium immediate annuity. So

[03:34] let’s break the words down. Single premium, meaning you take the lump sum, half a million, five billion, whatever the number is, of cash value. And at the same insurance company, although you could clearly check others as well, you ask for an immediate, so we have single premium, that’s the lump sum of the cash value, immediate, meaning like starting next month, annuity. And that’s where people get confused. The word annuity is not well used in our normal lexicon. And so a lot of people think of annuities as an investment, something you might put like just regular money in or even IRA money in. Well, in this discussion, an annuity is an immediate annuity, meaning it’s going to start to pay you a monthly income. Are you ready for this for life? So you’ve put a single premium in,

[04:27] you get monthly income, and it pays you the rest of your life, no matter how long you live. Not bad. Okay. So I’ve got some follow up questions on this. I’m sure there’s a few more things. So are you ready? Can I do some rapid fire here? Yep. Excellent. Okay. So at what age can a person enact this? Really at any age, but older is better. So 85 is better than 80. And notice I didn’t start with 75. Like you want to be in your 80s, 90 is better than 85, 95 is better than 90. Okay. And what happens to the balance of it? That’s the big question. So this is why maybe you don’t do this with everything, because if you do die early, then you are leaving money on the table. If you die, quote, late, though, the insurance company will have paid you more than you gave them.

[05:25] So this is an area of certainty that you are purchasing a guaranteed income stream for. You are willingly giving up an asset to turn that into a lifetime income stream. So that’s why older is better because this is an actuarial calculation, not a mathematical calculation. And you do have some nuances. For example, you can do five years certain or 10 years certain so that you can be certain that at least the bulk of that asset would get passed onto the next generation if death did occur early. And this is again, something that you just have to make a careful decision on because the risk of longevity of living a long, long time is literally in this case, being shifted to the insurance company for them to take on because you’re hoping to live a long, long, long time whereby they

[06:19] would actually pay you out more than you gave them plus whatever interest they would have earned on it. You know, what’s really cool about that is, and I know it sounds kind of harsh to say cool about it, but you’re changing the goalposts because I think what happens with a lot of people is that they start to see that money that they worked hard for in those investments and they start to get to age and see it dwindling. And they project out when that money is going to be gone. And coincidentally, they develop some kind of sickness or something happens in their life that they don’t outlive their money. Whereas this, we’re flipping the table on. Yep, that is correct. And longevity is something that

[07:01] really has become more and more of an issue these days because people just didn’t used to live this long. I know I’ve got older family members that are shocked that they’re still living and they’re quite healthy. You know, they’re not going anywhere anytime soon. So this is a risk that we are all facing and we’re going to face it more and more and more. And it is something that can be shifted to an insurance company. That’s the whole point of insurance is shifting risk. What are the tax implications and what does that look like? And what should a person coordinate with their accountant? So annuities are taxed in a very complicated way that I won’t even bother getting into. Just understand that some of the growth

[07:47] is going to be taxed. And so that’s okay. This is one of those times where, and it is going to be income tax. It’s not capital gains tax. But this is one of those times where you don’t want the tax tail wagging the financial dog. So if it’s IRA money, of course, at this point, you’re probably well past RMDs and that kind of thing, assuming they don’t change the rules, require minimum distributions for IRAs, which are 72. So again, now we’re talking you’re in your 90s. You’re going to pay taxes if it’s IRA money on all of it. If it’s not IRA money, you’re going to pay taxes on some of it. It is income tax. That’s okay. Pay the tax. It’s profitable and it’s designed to be so. So pay the partial tax. You’re of

[08:31] course going to get your own principal back without tax. And so that’s valuable. But let’s understand that when you’ve earned a profit in America, we share that profit with the government. Yes, we do. Now, one key point that you put on, which is that this is a best case scenario when you have multiple policies, not just a single policy, correct? Correct. Because then you can take one policy and do a SPIA with it and leave the other policy or policies in place to pass on to the next generation or the charity or whatever it is that you’re passing your death benefit on to. Okay. So I’m going to throw one more curveball at you. Why do this versus doing a reverse mortgage? Yes. So this SPIA idea is one of

[09:20] five different ways that you can use your death benefit while you’re living. And the reason it works for a SPIA is because let’s say you have 500,000 of cash value and your death benefit is 750,000 and you create a SPIA, which then pays you out more than the 500,000 because you live a long time. So in essence, that’s getting access up into that higher $750,000 number. Well, you could do the same combining of strategies with a reverse mortgage and the $750,000 death benefit and get some tax-free income. You asked about taxes from a reverse mortgage. That’s a fabulous strategy. It’s not necessarily an either or frankly, like in all things, right? We want to be in the house of both. So let’s look at how we

[10:13] could take advantage of both strategies. And there’s three or four more out there that are under this rather loose category of using your death benefit while you’re living. Life settlements are one of them. Charitable remainder trusts are another. The pay down idea is another. So if you’re curious about this space, one of the very first books that we put out, Live Your Life Insurance, the entire part two section, which is only about 20 pages or so, details these strategies fairly thoroughly. And it even shows some numerical examples of how people have used their death benefit in combination with other assets that they have and other strategies that they’re using to get the use of it while they are

[11:02] living. I mean, we’ve got to remember this stuff is called life insurance, not death insurance. You’ve really created the house of both on this. This is great. And I think I’m going to summarize it with the example used earlier. The gentleman, what’d you say? 96 year old that is in an assisted living facility. Is that correct? The example is someone that may not be able to do a reverse mortgage, but they were prudent. They’ve done what they can to be smart with their money. And now you’ve added another tool in the toolbox. So this is great. Well said. Fun stuff to do. Yes. Well, listeners, if you happen to know of a friend, a relative, maybe you have a parent that could be coming up on this type of situation and you know that they’re looking for

[11:48] solutions and you don’t want to do the reverse mortgage, or maybe that is on the table, but you just want to get the cleanest and clearest picture, reach out to hello at partnersforprosperity.com. And for other listeners, if you have questions like this, and we love complex questions and personal ones because then we can discuss them here on the podcast, send those to hello at partnersforprosperity.com. Thank you for listening to the Prosperity Podcast. To take control of your money and have it work for you, visit us at partnersforprosperity.com. If you liked this episode, make sure you subscribe and leave a review.