Benefits of Using Required Minimum Distributions (RMDs) to Purchase Life Insurance

What are Required Minimum Distributions?

Required Minimum Distributions (RMDs) generally are minimum amounts that a retirement plan account owner must withdraw annually starting with the year that he or she reaches 72 (70 ½ if you reach 70 ½ before January 1, 2020). The RMDs are regulated by the IRS.


In talking with many of our clients recently, we have found that there is a group of clients who are being forced to withdraw their annual RMDs, but the client is blessed to not need the money for immediate expenses. Many clients are being forced to take out these RMDs, but since they do not need to be spent immediately, they are placing them into a checking or savings account for lack of a better place to put them.


Instead of placing in a savings account that is currently making very small interest, consider investing your RMDs into life insurance instead. Utilizing the premiums for life insurance will benefit the beneficiaries of the policy by:

  1. Growing the investment

  2. Avoiding future estate taxes

  3. Ensuring final expenses are covered

Purchasing a whole life or universal life insurance policy utilizing the annual RMD for premium payments will allow the premium payments to be transformed into a death benefit. Generally speaking, the amount of money that is paid into a contract in premium is a smaller amount than the death benefit that is paid out to the beneficiaries upon death of the insured.


Utilizing the RMDs as premium payments will allow clients to avoid future taxes. Upon death, money passed to heirs from checking and savings accounts is taxable income to the beneficiary. Life insurance is one of the few vessels that allows individuals to pass money to their beneficiaries tax-free.


Finally, and arguably most importantly, the life insurance policy can assist in paying final expenses for the insured. The piece of mind for not only the insured, but also their loved ones, that these final expenses are covered is a wonderful gift.


But what if down the road a client needs to use their RMDs? Most universal life and whole life insurance policies allow policyowners to access the cash value of the policy either through a policy loan, withdraw or surrender. Depending on the details of your need for the money, these options should allow the policyowner to access cash in the policy should it be necessary.


Questions on life insurance? Give our office a call! 419-375-4181







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