Using Social Security benefits to maximize a legacy

If your clients are fortunate enough to not need some or all their Social Security benefits for retirement income, using that money to purchase a life insurance policy can help them provide a larger legacy for children, grandchildren or a favorite charity.

How does this strategy work?

Social Security may and can be an integral part of your client’s planning. While it may not be central, it remains a cornerstone of many retirement plans. In some cases it can be used by a client as part of a wealth transfer strategy. An assessment of your clients’ needs, and a comparison with available resources can help identify any shortfalls that may exist. The earlier the process begins, the more viable the opportunity to arrange their personal estate and reallocate assets to help address future needs.

While most people use their Social Security benefits as retirement income, some of your clients may not need that money to live a comfortable lifestyle. If Social Security benefits are considered “excess,” the after-tax funds may just add to the clients’ portfolio and increase their estate and wealth transfer taxes upon death.

Instead of passing that money directly to heirs or investing it, your clients may want to consider using a portion or all of their Social Security benefits to purchase a life insurance policy. That will allow them to maximize their legacy, tax-efficiently.

Strategy in action

Bill and Debbie, both turning 66 at the end of this year, have accumulated substantial assets and will be receiving pension payments. They never even considered Social Security as a source of retirement funds. In discussions with their financial professional, they discovered that they will receive an estimated $64,000 in pre-tax Social Security benefits, which will equal $40,000 after taxes.

Bill and Debbie decide to use $20,000 of that money to fund an indexed universal life insurance policy on Debbie’s life to provide benefits for their four grandchildren.

See how much more they can pass to their grandchildren

Bill and Debbie could have simply passed $20,000 per year to their grandchildren, or they could have invested that money. Instead, they used it to purchase a life insurance policy. See the difference in their legacy!

 Approach  Annual Contribution  Over 20 years
 Gift  $20,000  $400,000
 Invest  $20,000  $554,765
 Insure  $20,000  $1,000,000

* Projected return is 5% before tax, 3.02% after tax.
** Assumes Social Security amounts are contributed to life insurance in all years.

This is a supplemental illustration authorized for distribution only when preceded or accompanied by a basic illustration from the issuer. The basic illustration contains values using the same underwriting assumptions as this supplemental at both guaranteed charges and guaranteed interest rates and contains other important information. The values represented here are for a $1,000,000 IUL Protect policy on a 66-year-old female preferred non-smoker.  The values represented here are for non-guaranteed and assume current charges and a current interest rate of 6.16%.  If guaranteed rates and charges are used, the policy would fail in year 25 (at age 91).  A client's values will be different based on gender, age and health. 

Prospective client

  • Healthy and has a life insurance need or capacity for life insurance purchases
  • Age 62 or older
  • Qualifies to receive Social Security benefits, but does not need them for retirement income
  • Would like to enhance or create a financial legacy

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Please be advised that this webpage is not intended as legal or tax advice. Accordingly, any tax information provided is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer. The tax information was written to support the promotion or marketing of the transaction(s) or matter(s) addressed, and clients should seek advice based on their particular circumstances from an independent tax advisor. Neither Equitable nor its affiliates provide legal or tax advice.

Life insurance products are issued by Equitable Financial Life Insurance Company (New York, NY) or Equitable Financial Life Insurance Company of America (Equitable America), an Arizona stock corporation with its main administration office in Jersey City, NY and are co-distributed by Equitable Network, LLC (Equitable Network Insurance Agency of California in CA; Equitable Network Insurance Agency of Utah in UT; Equitable Network of Puerto Rico, Inc. in PR),  and Equitable Distributors, LLC. Variable Products are co-distributed by Equitable Advisors, LLC (Member FINRA, SIPC) Equitable Advisors in MI and TN and Equitable Distributors, LLC. When sold by New York based (i.e. domiciled) financial Professionals life insurance is issued by Equitable Financial Life Insurance Company.

IU-2969430 (08/2020) (Exp. 08/2024)