After death, far more is paid in income taxes than in estate taxes. This is a fact that producers need to address with clients.
Only the richest people pay estate taxes. But anyone with an IRA, employer retirement plan, or annuity will pay income taxes upon distribution of the benefits. For example, the heirs of your building janitor, who has a 401(k), will pay income taxes after death.
Naturally, early distribution penalties do not apply at death. But the income taxes still must be paid.
And, absent retirement planning, the entire account balance might have to be distributed within five years of death–with income taxes due accordingly.
Insurance and planning professionals often put too much emphasis on estate taxes, without proper consideration of income taxes at death. To be sure, death taxes in this sense include not only estate taxes, but also income taxes.
A better way to approach life insurance prospects who have a retirement plan might be this: Instead of speaking about life insurance needs at the start, discuss income taxes due after death.
Then, after identifying the income taxes as a problem, discuss life insurance as the solution.
The problem of income taxes is not a new development. If you were to search the National Underwriter Web site archives for articles on Income in Respect of a Decedent (IRD), you would find articles on this issue.
Using life insurance to protect the IRD assets from shrinkage is also not a new idea.
But, discussing the income tax issue first–that may be a different approach for many producers. It is a retirement planning approach and not a life insurance planning approach.
