Create a Tax-Efficient Legacy with Predictable Lifetime Retirement Income
Buy low in one market. Sell high in another.
It’s the basic philosophy of investing, driven by arbitrage. Many clients are taking advantage of arbitrage in some form, be it stocks, bonds, currency, real estate or another leveraged investment to build portfolio wealth.
But what about leveraging the price discrepancies between insurance products?
What is Annuity Arbitrage?
As clients near retirement, the balance between growth potential and risk becomes crucial. Annuity arbitrage is a financial strategy that involves leveraging the guaranteed income generated from an annuity to fund the premiums of a life insurance policy.
Properly structured, it can create a tax-efficient legacy while providing a secure, predictable income during a client’s lifetime.
Here’s how it works:
Purchase an Annuity
Clients invest a lump sum into a fixed indexed annuity (FIA) or single premium immediate annuity (SPIA). This annuity provides regular, guaranteed income payments for a specified period, often for life.Fund Life Insurance
Use the income generated by the annuity to pay premiums on a permanent life insurance policy. This policy builds cash value over time and, more importantly, ensures a tax-free death benefit for your beneficiaries.Maximize Wealth Transfer
The life insurance death benefit is designed to be larger than the original amount invested in the annuity, effectively creating a significant, tax-efficient financial legacy. This strategy is particularly advantageous when using qualified funds, such as those in an IRA, where the funds are subject to taxes when withdrawn.
The beauty of annuity arbitrage lies in its ability to provide a stable income stream, while simultaneously amplifying the wealth passed on to heirs or donated to charity. It flips a potentially inefficient tax scenario into a powerful estate planning tool.
Funding with Qualified Assets
A significant amount of wealth is held in qualified funds, such as IRAs or a 401(k).
This money will be spent down or given away — either intentionally through a systematic withdrawal, or unintentionally through required minimum distributions. Whether it’s at age 73, 74 or 75, something is going to have to happen.
Since it will be distributed, it won’t be part of your assets under management (AUM) forever. So, let’s focus on a strategy to get the most from it, with minimal impact on your business.
Increased Tax Efficiency
Qualified accounts offer valuable tax-deferred growth during the accumulation phase. However, they can also present unique challenges as your clients enter retirement. They are a double-tax-dollar asset, subject to tax when distributed, as well as potential estate taxes when gifted to heirs.
Qualified assets are the most inefficient asset to hold in one's estate. Annuity arbitrage helps minimize taxes, maximize return and transfer more to the next generation.
Ask your clients, “How do you plan on spending these dollars?” Are they going to spend this money through a systematic withdrawal? Will they take an RMD? Do they want to give it away to charity?
Asset Location vs Asset Allocation
If they don’t need the money for retirement, why not get guaranteed rates of return? For anyone who is within 10 years of a retirement event, ask them, “What percentage of your qualified assets would you like to have a lifetime guaranteed rate of return potentially north of 7%?”
The answer is likely close to 100%.
For ultra-high-net-worth clients, qualified funds are just a drop in the bucket of their net worth. But it doesn't have to be a million dollars. It works at $100,000 — and may be even more impactful for that individual’s legacy.
You’re really moving it from one pocket to the other to maximize a client’s estate.
At some point, a payment on the life insurance will take place, which acts like a Roth. This is where the strategy of annuity arbitrage becomes powerful. Your clients receive a tax-free lump sum of money to invest for the next generation. And that creates a ripple, where you gain a better chance of keeping the beneficiaries and the next generation assets on your books. You’re protecting your AUM while creating more wealth. No market value adjustment. No taxes. And if you structure it right, no estate taxes.
It’s a perpetual strategy in the best interest of your clients, their family and the generation beyond their kids.
Why Act Now?
In the current financial landscape, rising interest rates have led to higher annuity payouts and lower life insurance premiums. This unique set of circumstances creates a time-sensitive opportunity that savvy investors should consider immediately.
Ideal Interest Rates + Lower Insurance Premiums
In recent months, annuities have offered higher payout rates than we've seen in years. This is crucial — because the income generated by these annuities is the foundation of the annuity arbitrage strategy.
Right now, your client’s initial investment in an annuity can generate substantially more income, which allows you to fund a more significant life insurance policy.
It’s the ideal arbitrage scenario: clients can secure a significant guaranteed income from an annuity while simultaneously locking in low premiums on a life insurance policy.
At the same time, rising interest rates have driven down life insurance premiums and led to greater cash value gains inside of a policy. And that means your clients can get a larger tax-free death benefit for their beneficiaries.
These conditions are creating a lovely arbitrage, all funded by the same amount of capital that would have produced far less just a few years ago.
Impending Estate Tax Changes
Beyond market conditions, upcoming changes in estate tax laws add another layer of urgency. The current lifetime gift and estate tax exemption is set to sunset at the end of 2025. If Congress does not act to extend these provisions, the exemption could drop significantly, potentially exposing a larger portion of your client’s estate to federal taxes.
Estate taxes are going to touch a lot more people, creating more opportunities to help families transfer wealth efficiently.
This reduction could bring more estates into the taxable range. By implementing an annuity arbitrage strategy now, clients can effectively move assets out of a taxable estate and into a life insurance policy, which pays a tax-free benefit to beneficiaries.
Lock In While You Can
The iron is hot right now and these favorable conditions won’t last forever. Interest rates will change. Premiums could rise. And tax laws are always subject to revision.
That’s why it’s crucial to talk to clients now. Using annuity arbitrage, you can secure a powerful, tax-efficient strategy that will benefit your clients and the causes they care about for generations to come.
It’s the perfect storm to amplify wealth transfer without additional out-of-pocket costs.
It All Adds Up
To go deeper on this topic, simply look at the math.
What are the best payouts on these solutions? What does life insurance cost look like? What’s the power of transferring wealth without a market value adjustment worth in your client’s portfolio?
We’ll help you line up the income from the annuity with the premium of the insurance policy and select products that work best together. Watch the video below to see how it works in more detail!
Mike McGlothlin, CFP®, CLU®, ChFC®, LUTCF®, NSSA® is a bestselling author, industry-renowned speaker and expert in growth strategies for financial advisors.
Today as the Executive Vice President of Retirement for Ash Brokerage, he leads 65 direct reports who have grown the business line to one of the largest wholesaling teams in the Brokerage General Agency space.
As a professional guide, he can help any financial advisor looking to create exponential revenue growth, to find new clients and better streamline their operations by incorporating simple methodologies and proven models.
