The Lutheran Community Foundation

Life insurance can be an effective, tax beneficial way to benefit heirs in replacement of an asset redirected to charity.

Target Audience:

• Client is insurable
• Desires to leave a portion of the estate to his/her heirs
• All other financial needs are covered by outside resources

Practice Tips

If a portion of the payment from a gift annuity or charitable remainder trust will be used to pay the premium for the wealth replacement policy, consider the following:

• Use conservative estimates when determining the client's capacity to make premium payments.
  • A portion of the income received from charitable trusts and gift annuities is taxable. Make sure taxes are factored into the analysis.
  • Take into account cash flow issues as well. Income from trusts and gift annuities are paid on a quarterly basis. Make sure the client has sufficient funds to cover the first premium payment.
  • Income from a charitable remainder unitrust can vary from year to year. Consider how a decline in trust payments will affect the client's ability to make premium payments.
• Illustrate dividends conservatively.
• Plan ahead for potential issues in the future related to mental capacity .
  • It is sometimes better to issue a policy that is scheduled to be paid-up over a short period of time rather than a policy that requires payments for life.
• Include family members in the conversation.
  • Family members might be more supportive of the charitable gift if they understand that wealth replacement insurance is part of the plan.
• Review the health of the policy at least annually once it is issued.
  • Life insurance should not be viewed as a stagnant investment. It is better to identify problems early on than when it is too late to make adjustments.
  • Ask if the death benefit can expire due to longevity and if so when does that occur?
  • Is the assumed rate of return used in the initial illustration still realistic?
  • Potential options available to the client if there are problems with the policy:
    • Terminate Policy
    • Increase Premium
    • Reduce Death Benefit
    • Cash-in Policy
    • Exchange for New Policy