What happens when clients have an annuity they’ll never fully spend?
Unfortunately, those leftover funds often become a tax burden for beneficiaries.
With an annuity maximization strategy, clients can provide their loved ones with a tax-free death benefit by converting an unneeded annuity into a life insurance policy. However, many don’t realize this is an option.
For financial professionals, annuity maximization isn’t just a smart tax strategy for clients—it’s a valuable relationship-building strategy and a smart way to add depth to annual reviews.
In this case study, we’ll explore how one client worked with their financial professional to transform a taxable annuity into a life insurance policy that created a $758,000 tax-free death benefit while protecting retirement assets from long-term care (LTC) costs.
What Is Annuity Maximization, and Who Is It For?
Annuity maximization is a strategy that uses distributions from an annuity to fund a life insurance policy.
It’s ideal for clients who:
- Are age 60+ who don’t need all their annuity for retirement income
- Want to pass on wealth tax-efficiently
- Are insurable and open to repositioning assets
- Want LTC protection alongside legacy planning
What Are the Tax Benefits of Annuity Maximization?
While annuities can be an effective tool for growing assets and generating retirement income, they may not be the most tax-efficient asset to leave behind since beneficiaries will still owe income taxes on the remaining value.
By using annuity income to fund life insurance, clients can:
- Convert taxable income into a tax-free death benefit
- Reduce the tax burden on beneficiaries
- Potentially reduce the amount of ordinary income tax on annuity growth
Related: Asset Location and Tax Management Inside a Portfolio [Case Study]
Can An Annuity Maximization Strategy Help Fund LTC?
An annuity maximization strategy can help fund LTC expenses when purchasing a life insurance policy with a LTC rider.
Here’s how it works:
- Annuity income is used to pay premiums on a life insurance policy
- The life insurance includes an LTC rider, which allows the insured to access part of the death benefit to cover qualifying long-term care needs
- This provides dual benefits: a tax-free legacy for beneficiaries and protection against future care costs
This approach is especially valuable for clients who:
- Don’t want to dedicate a large pool of assets to standalone LTC insurance
- Want to maintain control over their funds
- Are concerned about protecting retirement income from future medical costs
Case Study: A Successful Annuity Maximization Strategy in Action
The following case study is a real-life example of how repositing an existing annuity provided a client with annual income, a tax-free death benefit, and LTC protection.
The Client Profile
- Age: 65
- Goal: Set aside funds for children without gifting immediately, in case the funds are needed
- Concern: Potential future LTC needs
The Challenge
- The existing annuity is projected to grow to $530,185 by age 86
- After taxes, the beneficiaries would only receive $451,000
The Strategy
- Reposition the annuity into a new fixed index annuity (FIA) with an income rider
- The income rider provides $25,765 in annual income
- The after-tax amount of $19,581 is used to fund life insurance premiums
- An LTC rider is added to the life insurance policy for additional protection
The Results
- A $758,000 tax-free death benefit
- Access to $30,000/month for LTC if needed
- Increased legacy value by $307,000
- Preserved flexibility while creating new access to care coverage
Related: Annuity Reviews & Updates: Finding Opportunities to Review Your Client’s Asset Allocation
How to Use Annuity Maximization to Deepen Client Value
Annuity maximization can be a useful tool for financial professionals to enhance legacy planning, reduce tax exposure, and add protection against long-term care risks—all while using assets clients already own.
An annual review may be the perfect time to revisit underutilized annuities to uncover opportunities to make a greater impact.
Annuity maximization isn’t just a smart strategy. It reflects your proactiveness as a financial professional, showing clients that you’re always thinking ahead to protect their legacy and enhance their long-term plans.
Looking to explore more strategies like this? Let’s connect and find the right solutions for your clients.
