NEW YORK -- A Pennsylvania reader, Roger Leigh, has added to my extensive collection of spiels that no one should hear from life insurance agents. The agent examined Leigh's sole pool of money -- an individual retirement account -- and proposed that it be stripped.
"According to the agent," Leigh writes, "it would benefit me to withdraw IRA money (without penalty) to purchase large amounts of permanent life insurance. I would then cancel all term insurance I now have and use that premium money to buy mutual funds."
The agent, Sanford Guritzky of Bridgewater, N.J., represents New England Life. "The overall result," Guritzky wrote to Leigh, "is that you would have substantially more assets at your projected retirement, and of course much more to pass on to your children."
Other readers might hear this same pitch, which is why I want to explain it to you. Leigh himself never got a written IRA-to-insurance plan. In a letter, Guritzky promised to review the matter, in great detail, "at the time the insurance is issued."
When I asked Guritzky for those details, he declined. "I refuse to give away my talent," he said. He asserted that, using his plan, Leigh would "probably have two and a half times the assets he'd have now." "I could prove it," Guritzky added, "but I choose not to."
I asked two specialists to review the idea, using the financial data that Leigh provided. Peter Elinsky, tax partner with KPMG Peat Marwick, and Peter Katt, a fee-only life insurance adviser in West Bloomfield, Mich., both hated it. Says Elinsky, "the agent is taking retirement money and converting it into insurance, and taking insurance money and converting it into retirement. The exchange is going to be costly, in both sales commissions and taxes."
One thing that puzzled Leigh, 48, was how he could tap his IRA without penalty in order to pay insurance premiums. The basic IRA rule says: Any withdrawals before age 59 and a half trigger a tax penalty of 10 percent.
But there's a little-known exception. It says: no penalty, if you make substantially equal annual withdrawals based on the number of years you're expected to live. Leigh has $54,000 in his IRA. According to tables published by the Internal Revenue Service, he could take as much as $5,137 a year without penalty, Elinsky says.
But he does owe income taxes on each withdrawal. So he's taking money out of one tax shelter (the IRA), paying taxes and sales commissions, just to put it into another shelter (life-insurance cash values). "It sounded to me like a lot of shifting money around," Leigh says. So very true. That's a good point to keep in mind if an agent should present you with a similar proposal.
Leigh currently carries $105,000 worth of cash-value coverage and $356,000 worth of term insurance, so his wife and two teen-age sons are well-protected. When his sons leave home, his need for insurance will drop. What he does need are more retirement savings. Even though he has a government pension, from his job as a youth group worker, $54,000 in an IRA isn't enough.
But he won't solve his problem by pillaging his IRA, and paying extra taxes, to create new cash values inside an insurance policy. Doing so would weaken both his savings and his current insurance coverage, Katt says. Here's why:
* The $5,137 he took each year from his IRA wouldn't buy a large enough cash-value policy to replace the term insurance he'd cancel. He could get around $250,000 in well-funded coverage, Katt says. It's possible to buy a larger policy. But with this annual premium, the policy would be underfunded and probably wouldn't last for life.
* The money shifted out of the IRA and into life-insurance cash values probably wouldn't grow as fast. For this calculation, Katt assumed that both investments grew at 7.75 percent. After expenses, the insurance would have paid a net of 6.5 percent. If $5,000 a year were left in the IRA, it would grow to about $165,000 by age 65, Katt says. If it were withdrawn, taxed, and switched into life-insurance cash values, it would grow to only $73,000.
* He'd have less retirement income. Even after taxes, the IRA would yield a higher lifetime income than Leigh would get by withdrawing or borrowing cash from his life insurance.
* His wife would probably have more money if he died at a late age and she survived him. But she'd have less while he lived and less if he died young. Does this sound like a good idea to you?
Jane Bryant Quinn is a syndicated columnist. Write to her at: Newsweek, 444 Madison Ave., 18th Floor, New York, N.Y., 10022