Life insurance helps protect IRA values
Unfortunately, the SECURE Act of 2019 made it more difficult for the beneficiaries of IRAs and other retirement accounts to postpone distributions from these inherited accounts. No longer can most non-spouse heirs “stretch” these accounts out over their lifetimes and thereby preserve favorable tax deferral options.
Instead, as a result of the new law, if you inherit an IRA from someone who is not your spouse, you generally must withdraw the assets in the account within 10 years.
The 10-year rule applies to both traditional IRAs and Roth IRAs, and for most beneficiaries the law change has limited the possibilities of tax-deferred growth.
On the other hand, regulations associated with the SECURE Act have made life insurance options more attractive for estate planning.
Ed Slott, a recognized retirement and IRA expert, argues that life insurance “is not only the single biggest benefit in the tax code, but is also the most cost-effective way to protect a large IRA” for beneficiaries.
According to Slott, the SECURE Act makes life insurance a much better estate planning vehicle than an IRA. Those with high-value IRAs who wish to preserve wealth for their heirs should consider drawing down IRA funds at the lowest possible tax cost and moving funds earmarked for beneficiaries to life insurance.
The result will be larger inheritances, more control and less tax. After all, there is no income tax to beneficiaries from proceeds from life insurance. That means fewer required minimum distributions (RMDs) and a reduction in stretch IRA problems.
Life insurance can simulate the stretch IRA without the tax implications. In addition, life insurance is a better planning vehicle for “special needs” beneficiaries. It is also a better planning option for second marriages, and solves potential qualified terminable interest property (QTIP) issues.
Slott believes that it is more likely that Congress will change tax laws in ways that will not benefit IRA beneficiaries than to change laws that would reduce insurance benefits.
Advantages of permanent life insurance
Life insurance, Slott argues, can double as a tax-free retirement account. It can create additional tax-advantaged funds when other retirement plans are maxed out.
The cash value of life insurance can be used in lieu of taxable retirement funds to lower taxes in retirement, resulting in a tax-free income stream in retirement. Distribution will not create stealth taxes.
There is also less investment risk and tax risk associated with life insurance.
Insurance proceeds are tax-free; tax-free cash is always the best source of money, and also solves many non-tax problems. A non-spouse beneficiary of a traditional IRA will be subject to income taxes on withdrawal from traditional retirement accounts; recipients of life insurance proceeds are tax-free.
Long-term care riders can be used, which would reduce benefits for beneficiaries but would protect your beneficiaries from expensive nursing home costs.
If a surviving spouse is due to inherit a traditional IRA, the availability of tax-free insurance proceeds would allow him or her to fund conversion to a Roth IRA.
A few drawbacks
Not everyone is insurable; you must medically qualify for coverage. There is no tax deduction when you purchase.
It is not flexible in the early years after purchase. Life insurance is associated with long-term planning; funds are not liquid in the short-term. And of course, policy premiums must be continually paid to keep policy in effect.
Bottom line: From an estate planning viewpoint, life insurance options offer significant advantages for many people. It can provide larger inheritances, more control and less taxes for beneficiaries.
In addition, it is much more likely that future regulations will provide more advantages for life insurance options than for retirement account options. Congress seems to be anxious to pass legislation that will result in higher taxes from beneficiaries of retirement accounts and within shorter time frames.
Elliot Raphaelson welcomes your questions and comments at raphelliot@gmail.com.
© 2026 Elliot Raphaelson. Distributed by Tribune Content Agency, LLC.
