How Buying Life Insurance Benefits Your Heirs

Using required IRA distributions to buy life insurance can provide heirs a tax-free windfall. However, the strategy isn’t for everyone. Starting when you reach age 70, you are required to take a distribution from your traditional every year. But what if you don’t need the money and would like to maximize a payout for your heirs? Does buying life insurance help?

You can buy a life policy with a guaranteed death benefit and set aside your required minimum distributions to pay for premiums. People typically want to create certainty that their legacy will happen. They want a contract guarantee. Your heirs will inherit life insurance proceeds free of income. Is your estate is large? Plan so that the insurance proceeds avoid federal estate tax, too.

There are drawbacks to that strategy. Consider whether the money you will pay in premiums that you need for other expenses like unexpected medical bills. You want a policy that will last as long as you do. But those types of policies are pricier than a term policy, which expires after a certain period.

Your age and health will factor into the premium costs, as will the amount of the death benefit you want.  Take a 71-year-old man deemed a standard risk for example. If he wants a policy with a $1 million death benefit, he pays about $40,000 a year in life insurance premiums..

Also, having the extra pot of money could encourage non-spouse beneficiaries to take RMDs based on their life expectancies rather than making large withdrawals to pay expenses, perhaps to send a child to college. But you don’t necessarily need life insurance proceeds to achieve these ends.

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