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Financial Planning Idea for the Day: Turn Life Insurance Into an Annuity For Income

Welcome to the 4Thought Financial Group ‘Financial Planning Idea for the Day’ video series, with our CFO and host, Martin Levine. This week, Levine discusses how the cash value of old life insurance policies can be directed to an annuity to create additional income. 

Looking for additional income is a common dilemma for retired seniors, and Levine encountered exactly this situation with a client who visited his office earlier this year.

“Recently, a retired client came into our office for a review. This client needed additional income,” he says. “Upon closer review, I looked at old life insurance policies that the client had bought many, many years ago, when his children were young. Now that his children were married and out of the house, the need for the life insurance part is no longer necessary.”

Levine explains that old life insurance policies aren’t only valuable in times of death, but can also be used to generate additional streams of income long before that. 

“What’s good about these old life insurance contracts were they had cash value. And there’s a law, section 1035 of the IRS Code, that allows you to take cash value from a life insurance policy and direct it to an annuity,” he says. “And the nice part is there’s no tax on the transfer and the best part of it is there’s new income that comes in.”

“There’s tax on the income, true, but you just took an asset that wasn’t generating any income for you and made it an income-producing asset,” he continues.

So today’s Financial Planning Idea for the Day is all about a simple and effective way to generate some additional income through old life insurance policies.  

“Don’t discard old life insurance policies so fast, there may be a tax upon surrender, but if you do it this way, the tax will only be paid when the income comes out, and you’ll get additional income,” concludes Levine. 

Check back for the 4Thought Financial Group ‘Financial Planning Idea for the Day’ every week, as Martin Levine tackles frequently asked questions from clients spanning a wide range of topics, such as micro versus macro investment options, breaking down retainer fees, and avoiding high investment fees, among many others.

4Thought Financial Group is a Syosset, New York-based provider of Retainer Fee-Based Wealth Management services specializing in delivering effective financial planning solutions aligned with clients' lifelong goals.

Contact 4Thought Financial Group today, and let’s build wealth, together.


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