The Lutheran Community Foundation

Concept Overview
• Determine the annuitized annual payment.
• Determine the “Exclusion Ratio”.
• Use the Exclusion Ratio to determine what percentage of the income is tax-free and what is taxable.
• Determine how much life insurance the client could purchase using only the taxable income.
• Determine how much life insurance the client could purchase using only the tax-free income.

Client
• Widow, age 60, with one son.
• Has all income needs met for rest of life.
• Has adequate LTC insurance.
• Has Medicare Supplement.
• Has all survivor life insurance needs met.
• Has charitable intent and likes LCF.
• Owns commercial annuity worth $272,271.

Client Goals
• Desires to give some of the annuity to her favorite charities and leave, at least, a like amount to her son.
• Does not want to pass on income tax burden to son.

Annuity Facts
• Current value: $272,271
• Basis: $187,520
• 10 year annuity income: $33,217 (122 x 272.271)
· Rule of thumb for this client profile is that the payout will be $122 per year per $1,000 of cash value in annuity (actual value from illustration was $33,235)
• Expected return: $332,350 ($33,235 x 10 years)

Determine Exclusion Ratio (portion of income excluded from income tax vs. taxable income)
• Investment (basis)/expected return.
• $187,520 / $332,350 = 56.4% tax-free income.
· 56.4% x $33,235 = $18,744 tax-free income annually
• Leaves 43.6% taxable income.
· 43.6% x $33,235 = $14,490 taxable income annually

Determine how much charitable life insurance the client could buy with the taxable portion
• Rule of thumb for this client profile is that each $1,000 paid into the policy will buy about $21,000 of death benefit.
• 14.490 x $21,000 = $304,290 (actual face amount from illustration: $310,000).

Determine how much wealth replacement insurance the client could buy with the tax-free portion
• 18.744 x $21,000 = $393,624 (actual face amount from illustration: $410,000).

Case Summary
• Client eliminated tax liability on annuity by giving to LCF.
• Client’s charitable goals are accomplished.
• Gave tax-free cash to her son upon her death.
• Son received $163,154 more because of this concept:
· $272,271 - $187,520 = $84,751 gain
· $84,751 x 30% tax rate = $25,425 in taxes paid
· $272,271 - $25,425 = Net after tax $246,846
· $410,000 (insurance) - $246,846 (annuity income) = $163,154
• Benefits to FR:
· Insurance sold: $720,000
· Commissions earned: $6,215 (does not include additional bonus amounts)
· ABCs earned: $10,026