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Apr 12 2010 12:00AM


I am a divorced 62-year-old Dad with a five-year old son. I have a traditional Individual Retirement Account (IRA) worth $200,000. Instead of converting it to a Roth IRA, would you advise a single premium whole life insurance policy so I can leave a healthier legacy to my son? My dad is 85 years old and my thinking is when he passes, I could use some of the inheritance to fund the above insurance idea.


As with many things financial planning, the answer cannot be given in a vacuum. Typically, the answer would be given as part of a comprehensive financial plan, inclusive of a complete data gathering exercise. That said, financial planners do have thoughts and guidance regarding your situation.

"You have a great idea regarding funding a single premium life insurance policy for your son," said FPA member Brian Vosberg, CFP®, of Vosberg Associates. "Insurance is such a unique vehicle because of the favorable tax treatment at death. Given your age and the age of your son, insurance is a good way to protect the income and support that you provide him."

But in analyzing your question, Vosberg said he would need more information to better understand your situation. For instance, he would need to know:

  1. What funds would you use to fund the life insurance?
  2. What does your retirement situation look like? What age will you retire? How much income will you need in retirement? What will your retirement income be at retirement (Social Security, pensions, and the like)?
  3. Are you going to use your IRA money in retirement?
  4. What is your expected inheritance and would your Dad be willing to gift the life insurance premium now?
  5. Do you have savings to pay for the Roth IRA conversion?

For his part, FPA member Michael B. Hansen, CFP®, an Investment Adviser Representative with ING Financial Partners, echoed the notion that it's impossible to give a complete answer to a complicated question. "Without knowing what your values, goals and what is important to you, my advice can only be very limited; but I will try to give you a better answer than 'it depends,'" he said.

With regards to your IRA, Hansen said you will have to consider the following: How many more years do you plan to work? What is your tax-rate now and what do you believe it to be in the next few years? Will your income go up, stay the same or go down in retirement? Finally, you should consider the longevity of risk; i.e. the risk of you outliving your retirement assets with or without a long term care scenario.
"It sounds to me that legacy is important to you and thus you should explore the various legacy building strategies," said Hansen. "Life insurance is only one of them."

Meanwhile, FPA member Jason Mubarak, CFP®, of Morgan Stanley Smith Barney, said there are several things pertaining to a Roth IRA conversion and whole life insurance that would concern him. "First of all, it is not clear to me that converting a traditional IRA to a Roth IRA is a good idea in your specific case without knowing more about your current tax bracket, investment profile, expected retirement income needs, assumptions about future taxes and returns, and the source of funds used to pay the taxes that would be due upon conversion," he said. "Sometimes the financial media can make it sound like converting to a Roth IRA is always a good idea and the reality is that the decision is one that is not always clear and can result in significant negative tax implications. Second, to be clear I assume you are not considering purchasing whole life insurance with funds withdrawn from your IRA. Finally, I like to point out that insurance is intended to manage a specific risk or set of risks."

"Are you currently the sole provider for your son (financially and daily care)?" Mubarak asked. "If so, it seems to me that the biggest risk isn't loss of life (unavoidable at some point) rather premature loss of your life prior to your son growing up," he said. "This risk would effect both finances and care. If this is the case then legacy planning should be a distant second concern. Have you compared the cost of 15- or 20-year term insurance with whole life in your specific case?"

Read more about Roth IRA conversions.

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