RMDs and Life Insurance Premiums: When Withdrawals Fund a Policy You Don’t Need

The RMD Rules After SECURE 2.0

Required minimum distributions are the government’s mechanism for finally taxing money that grew tax-deferred. Once you reach the applicable age, you must withdraw a minimum amount each year from traditional IRAs, SEP and SIMPLE IRAs, and most workplace plans such as 401(k)s and 403(b)s.

The starting age has moved twice in recent years. The SECURE Act of 2019 pushed it from 70½ to 72; SECURE 2.0, passed at the end of 2022, raised it to age 73 beginning in 2023, and it is scheduled to rise to age 75 in 2033. Your first RMD can be delayed until April 1 of the year after you reach RMD age — but doing so means taking two distributions in that second year, which can stack income into a higher bracket.

The amount is not optional or negotiable. Each year’s RMD equals your account balance on December 31 of the prior year divided by a life-expectancy factor from the IRS Uniform Lifetime Table (a different table applies if your sole beneficiary is a spouse more than ten years younger). As the divisor shrinks with age, the required percentage grows — which is precisely why retirees in their eighties often find themselves forced to withdraw more than they spend.

Two useful exceptions: Roth IRAs have never required lifetime distributions, and beginning in 2024 SECURE 2.0 eliminated lifetime RMDs on Roth accounts inside workplace plans as well. Additionally, if you are still working past RMD age and do not own more than 5% of the employer, most plans let you defer RMDs from that employer’s plan until retirement. IRAs get no still-working exception.

What It Costs to Get RMDs Wrong

The penalty regime is less brutal than it used to be, but still worth taking seriously. Before SECURE 2.0, missing an RMD triggered a 50% excise tax on the shortfall — one of the harshest penalties in the tax code. The current rules impose a 25% excise tax on any amount you failed to withdraw, reduced to 10% if you correct the mistake within the applicable correction window by taking the missed distribution and filing properly. The IRS can also waive the penalty entirely for reasonable error if you take corrective steps and request relief, and current procedures and forms are published at irs.gov.

The tax treatment of RMDs taken correctly is straightforward but frequently underestimated:

• Ordinary income, not capital gains. Every dollar of a traditional-account RMD is taxed at your marginal income rate — for many retirees, a higher rate than the long-term capital gains they pay elsewhere.
• Knock-on effects. RMD income raises your modified adjusted gross income, which can push more of your Social Security benefits into taxation and can trigger Medicare’s income-related monthly adjustment amounts (IRMAA), raising Part B and Part D premiums two years later. An RMD does not just add income; it can raise the cost of everything means-tested around it.
• No re-sheltering. RMD dollars cannot be rolled back into an IRA or converted to a Roth. Once out, they are out — you can only spend, save, or invest them in taxable accounts.

This is the backdrop that makes the next question matter so much: after paying full ordinary-income tax to extract these dollars, where are they actually going?

The Familiar Pattern: RMD In, Premium Out

Here is a pattern advisors encounter constantly. A couple bought a large permanent life insurance policy — universal life, whole life, or a survivorship policy — in the 1980s or 1990s. The reasons were sound at the time: young children, a mortgage, a business, or an estate tax exemption that was a small fraction of today’s and threatened to take a large bite of everything they had built.

Thirty years later, the children are in their fifties, the mortgage is a memory, the business is sold, and the estate tax threat has receded for all but the wealthiest households. But the policy is still there, and on many universal life contracts the annual cost of insurance has climbed steeply with age. So each year, the couple takes their required distribution, pays ordinary income tax on it, and forwards what remains to the insurance company to keep the policy alive.

Think about what that chain really means. If a retiree in a combined 30% federal and state bracket needs $14,000 after tax for premiums, they must withdraw roughly $20,000 of IRA money to net it. Over a decade, that is around $200,000 of retirement assets — plus the growth those assets would have produced — consumed to maintain a death benefit nobody may need, while the same withdrawals may be inflating Medicare premiums along the way.

None of this means the policy is automatically a mistake to keep. It means the decision deserves to be re-made deliberately with today’s facts, rather than continued by inertia. If premiums have started to genuinely strain the budget, our guide on what to do when you can’t afford life insurance premiums covers the urgent version of this problem; the sections below cover the deliberate version.

When Keeping the Policy Still Makes Sense

Plenty of retirees should keep paying, and it is worth being honest about who they are. The strongest cases:

• Someone still depends on the death benefit. A spouse whose income would drop sharply at the first death, a child with special needs, or a family member the policyholder supports financially. If the benefit replaces real support, it is doing its job.
• Estate liquidity is a genuine issue. Estates built around illiquid assets — a family business, farmland, real estate — may need cash at death to pay costs, equalize inheritances among children, or avoid a forced sale. Life insurance remains one of the cleanest tools for that, especially inside an irrevocable life insurance trust.
• The policy is a good deal on today’s terms. Older policies sometimes carry guarantees that are unobtainable now — strong no-lapse guarantees, high guaranteed crediting rates on cash value, or favorable insurability locked in before health declined. For a policyholder in poor health, the expected return on continued premiums can be genuinely attractive because the benefit is likely to pay relatively soon.
• Pension or income decisions were built around it. Some couples elected a single-life pension payout specifically because insurance would protect the survivor. Dropping the policy without re-examining that structure can leave a surviving spouse exposed.
• Charitable intent. A policy naming a charity, or owned by one, may be worth maintaining as a leveraged gift.

The common thread: in each case the death benefit still has a specific, identifiable job. The question to ask is not “is life insurance good?” but “what, precisely, is this policy for now — and is that purpose worth what the RMD pipeline is paying for it?” The answer determines whether the right move is to stay the course or to start pricing the alternatives below.

Option	What Happens to the Death Benefit	Cash to You Now	Best Suited For
Keep paying from RMDs	Fully preserved	None	A benefit with a specific, current job: survivor income, estate liquidity, dependents
Qualified charitable distribution	Unchanged (addresses the RMD side)	None, but RMD income excluded from tax	Charitably inclined IRA owners 70½+ seeking lower AGI
Reduce face amount / reduced paid-up	Smaller benefit kept in force	None, but premiums drop or stop	Households needing some coverage at sustainable cost
1035 exchange	Replaced by new policy or annuity	None (value transfers tax-deferred)	Good insurability or a desire to convert coverage into income
Surrender	Ends permanently	Cash surrender value	Small remaining cash value needs, quick and simple exit
Life settlement	Ends permanently (transfers to buyer)	Typically 10–35% of face value; often 4–8× surrender value per GAO	Qualifying seniors (65+, $100k+ policy) with no remaining need for coverage

When It No Longer Does: The Estate Tax That Left the Building

The single most common original purpose for large permanent policies — federal estate tax — has quietly evaporated for the vast majority of families who bought them. In the late 1990s, the federal estate tax exemption was well under $1 million per person, and estates above it faced steep rates. A successful professional couple with a house, a business, and retirement accounts could realistically face a seven-figure estate tax bill, and buying a large survivorship policy to pay it was textbook planning.

Today the picture is entirely different. After the 2017 Tax Cuts and Jobs Act and subsequent legislation, the federal estate exemption stands at over $13 million per individual — more than $26 million for a married couple using both exemptions — which means only a small fraction of estates owe any federal estate tax at all. A policy purchased to solve a tax problem that no longer exists is a solution in search of a question, funded annually by taxed RMD withdrawals.

Some caveats keep this honest:

• Exemption levels are set by Congress and can change. Families near the threshold, or who expect significant future growth, may reasonably keep coverage as a hedge.
• A number of states levy their own estate or inheritance taxes with far lower thresholds, so state exposure deserves its own check with a qualified advisor.
• Estate tax is not the only reason for liquidity — the prior section’s list still applies.

But if the honest answer is that the policy exists because it has always existed, the household is spending real, taxed retirement income on institutional-grade coverage with no remaining mission. That is the moment to lay out the alternatives — and there are more of them than most policyholders realize.

Alternatives That Keep More of Your Withdrawal

Before deciding the policy’s fate, deal with the RMD side of the pipeline — then rightsize the insurance side.

Qualified charitable distributions (QCDs). If you are charitably inclined, an IRA owner age 70½ or older can transfer money directly from the IRA to a qualified charity. A QCD counts toward your RMD but is excluded from your income entirely — often better than taking the RMD and deducting a gift, because it lowers adjusted gross income, which helps with Social Security taxation and Medicare surcharges. The annual QCD ceiling is now indexed for inflation and exceeds $100,000 per person; current limits are at irs.gov. For a retiree already giving to charity while funding an unneeded policy, redirecting the flow can be the single cleanest fix.

Reduce the face amount. Most insurers will shrink a policy’s death benefit on request, cutting the required premium proportionally. Keeping, say, enough coverage for final expenses and a modest legacy while releasing the rest of the RMD for living costs is a middle path that surprisingly few policyholders are ever offered.

Reduced paid-up coverage. Whole life policies typically allow conversion of existing values into a smaller, fully paid policy — no further premiums, ever, with a guaranteed (smaller) benefit intact.

A 1035 exchange. Section 1035 of the tax code permits swapping one life policy for another — or for an annuity — without triggering tax on built-in gains. Exchanging an expensive, underperforming policy for a lower-cost guaranteed policy, or converting unneeded coverage into an income-producing annuity, can transform the asset rather than abandon it. Exchanges have real pitfalls (new surrender periods, new contestability, potential loss of old guarantees), so compare contracts line by line before signing.

Exiting Entirely: Surrender Versus Life Settlement

If the coverage has no remaining job at any size, the question becomes how to exit without simply abandoning value. Letting a policy lapse — the default outcome of quietly stopping premiums — recovers nothing at all, and it is how an enormous amount of policyholder value evaporates every year.

Surrender means handing the policy back to the insurer for its cash surrender value. It is fast and simple, but the amount is whatever the contract says, and on older universal life policies with rising insurance costs the remaining cash value is often modest. Gain above your premium basis is taxed as ordinary income.

A life settlement means selling the policy to a licensed third-party provider — institutional buyers backed by pension funds and asset managers — for a lump sum greater than the surrender value but less than the death benefit. For policyholders who qualify (generally age 65 or older, with a policy of $100,000 or more that has been in force at least two years), offers typically run 10–35% of face value, and the GAO’s study of the market found sellers received roughly four to eight times what surrender would have paid. The process takes 60–120 days, involves independent life-expectancy reviews, and is regulated state by state under frameworks based on the NAIC Life Settlements Model Act. Taxation follows a three-tier structure under IRS guidance: premiums paid come back tax-free, gain up to cash surrender value is ordinary income, and the remainder is capital gain.

The trade-offs are permanent: the death benefit is gone, proceeds can affect benefit-eligibility programs such as Medicaid, and offers vary meaningfully between buyers. For a full side-by-side comparison, see our guide to life settlement versus surrender, and start with the basics in what a life settlement is if the concept is new.

Run the Numbers: A Five-Question Framework

Here is a structured way to make this decision on facts rather than inertia. Gather the policy’s latest annual statement and an in-force illustration from the insurer (they must provide one on request), then work through five questions:

• 1. What is the true annual cost? Not just the premium — the pre-tax RMD dollars required to net that premium. A $12,000 premium funded from a traditional IRA at a 25% effective rate really costs $16,000 of retirement assets per year.
• 2. What job does the death benefit do today? Name the beneficiary and the specific need — survivor income, estate liquidity, special-needs support, legacy. If you cannot name one concretely, that is itself an answer.
• 3. What does the in-force illustration show? Many older universal life policies are on a path to lapse in the policyholder’s late eighties even with current premiums. Paying for years and then losing coverage anyway is the worst outcome, and the illustration reveals whether it is on the schedule.
• 4. What is each exit worth after tax? Price the surrender value, request a reduced paid-up quote, get 1035 exchange comparisons, and — if you likely qualify — obtain life settlement offers. Estimating what a sale might bring is covered in how much you can sell a life insurance policy for.
• 5. What would the freed-up cash flow do instead? Whether it closes a monthly budget gap, funds long-term-care reserves, or simply stops forced withdrawals from compounding into Medicare surcharges, weigh the alternative use explicitly — our piece on retirement income gap solutions offers a menu.

Bring the results to a fee-based advisor or tax professional who has no stake in the outcome. The right answer differs by household; the wrong answer is the one made by default, one premium notice at a time.

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Frequently Asked Questions

At what age do required minimum distributions start now?

Under SECURE 2.0, RMDs begin at age 73 for people who reach that age from 2023 onward, and the starting age is scheduled to rise to 75 in 2033. Your first distribution can be postponed until April 1 of the year after you reach RMD age, but that forces two taxable distributions into one year, which can push you into a higher bracket. Roth IRAs have no lifetime RMDs, and starting in 2024 Roth accounts in workplace plans are also exempt during the owner’s lifetime. The IRS publishes the current tables and rules at irs.gov.

What is the penalty for missing a required minimum distribution?

The excise tax is 25% of the amount you failed to withdraw, reduced to 10% if you correct the shortfall within the IRS correction window by taking the missed distribution and filing the required form. This is a significant improvement over the old 50% penalty, and the IRS can waive it entirely when the failure was due to reasonable error and you have taken steps to fix it. If you discover a missed RMD, act quickly: take the distribution, file Form 5329, and attach an explanation requesting relief rather than waiting for a notice.

Is it a bad idea to use my RMD to pay life insurance premiums?

Not inherently — it depends entirely on whether the policy still has a job. If someone depends on the death benefit, if your estate needs liquidity, or if the policy carries guarantees you could never buy today, funding it with RMD dollars can be perfectly rational. It becomes questionable when the original purpose — a mortgage, young children, an estate tax that no longer applies to you — has disappeared. In that case you are paying ordinary income tax to withdraw money that maintains coverage nobody needs, and alternatives like reducing the face amount, exchanging, surrendering, or selling the policy deserve a serious look.

Do I still need the life insurance I bought for estate taxes in the 1990s?

Possibly not. When many of these policies were sold, the federal estate exemption was under $1 million per person; today it exceeds $13 million per individual, so only a small fraction of estates owe any federal estate tax. That said, do not cancel reflexively: exemption levels can be changed by Congress, several states impose their own estate or inheritance taxes at much lower thresholds, and the policy may still serve survivor income or inheritance-equalization goals. Have an advisor confirm your actual exposure, then decide whether to keep, shrink, exchange, surrender, or sell the coverage.

How does a qualified charitable distribution reduce taxes on my RMD?

A QCD sends money directly from your IRA to a qualified charity once you are 70½ or older. The transfer counts toward your required minimum distribution but never appears in your adjusted gross income — which is more powerful than taking the RMD and claiming a deduction, because a lower AGI can reduce taxation of Social Security benefits and help you avoid Medicare IRMAA surcharges. The annual limit is indexed and now exceeds $100,000 per person. For retirees who already give to charity while paying premiums on an unneeded policy, redirecting RMD dollars through QCDs is often the cleanest first move.

Can I do a 1035 exchange from a life insurance policy into an annuity?

Yes. Section 1035 allows a tax-free exchange from a life insurance policy into another life policy, or into an annuity, without recognizing the built-in gain at the time of exchange. For a retiree who no longer needs a death benefit but holds meaningful cash value, converting to an income annuity turns an expense into an income stream. Watch the details: the exchange must be done insurer-to-insurer (never cash the policy out yourself), a new contract may impose surrender charges and a fresh contestability period, and old guarantees are lost. Note that gains inside the annuity remain taxable as ordinary income when eventually withdrawn.

Should I surrender my policy or sell it in a life settlement if I no longer need it?

Compare real numbers before choosing. Surrender pays the contract’s cash surrender value — fast and simple, but often modest on older universal life policies. A life settlement, available to policyholders who generally are 65 or older with a policy of $100,000 or more in force at least two years, typically pays 10–35% of face value, and government analysis found sellers received roughly four to eight times surrender value. Settlements take 60–120 days, involve life-expectancy reviews, and permanently end the death benefit, with proceeds taxed under a three-tier framework. Get both figures in writing and weigh taxes, benefit-program effects, and family needs.

Do RMD withdrawals raise my Medicare premiums?

They can. Medicare Part B and Part D premiums include income-related monthly adjustment amounts (IRMAA) for beneficiaries whose modified adjusted gross income exceeds set thresholds, measured with a two-year lookback. Because RMDs are ordinary income, a large required withdrawal — especially a doubled-up first-year distribution — can push you over an IRMAA threshold and raise premiums two years later. RMD income can also increase the taxable share of your Social Security benefits. Strategies such as qualified charitable distributions, which keep RMD amounts out of AGI entirely, are among the few ways to satisfy the requirement without that ripple effect.

Related Reading

• What To Do With Old Life Insurance
• Senior Financial Planning Checklist
• Life Insurance Divorce Settlement
• Funeral Costs Planning Guide

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Pine Lake Life Solutions does not purchase life insurance policies and does not provide legal, tax, or investment advice. Information provided is for educational purposes only. Eligibility for any option, including life settlements, is not guaranteed and depends on individual circumstances, policy terms, underwriting, and market conditions. Consult independent legal, tax, or financial professionals before making decisions regarding a life insurance policy.