Leveraging an Annuity with Life InsuranceIs this solution right for you?Review your current financial needs and goals. Questions to consider include:• Do you want to reduce your future tax burden?• Do you have coverage in place to cover your

basic financial needs?• Do you have assets that you won’t need for

future income?• Do you want to preserve assets for heirs?

764198

Leveraging an Annuity with Life InsuranceDo you own an annuity that will generate taxable annual income?• Will the income exceed your standard income

tax deduction?• Do you have charitable goals that you want to

accomplish?If you answered yes to these questions, you might benefit from converting your annuity to life insurance.

Leveraging an Annuity with Life InsuranceHow it worksThis solution takes an annuity that has appreciated in value and leverages it through two new life insurance contracts:• One to benefit your heirs• Second to benefit favorite charities through a

donor advised fund at the Lutheran Community Foundation

Leveraging an Annuity with Life InsuranceHow it works1. Annuitize your annuity over a fixed period of

years.2. Use the tax-free portion of each payment to

purchase life insurance to benefit your heirs, tax free.

3. Use the taxable portion of each payment to make premium payments to life insurance owned by the LCF. Premium payments provide a charitable tax deduction, which may offset the tax implications related to the annuity payments.

How it Works: Case StudyConcept Overview• Determine the annuitized annual payment and the “exclusion ratio”• Use the exclusion ratio to determine % tax-free versus taxable income• How much life insurance could be purchased with the taxable portion?• How much life insurance could be purchased with the tax-free portion?

Donor Story• Widow, age 60, with one son• Income, long-term care, Medicare supplement & life insurance needs met• Has charitable intent • Owns commercial annuity worth $272,271

Donor Goals: Wants to use some of her annuity’s value to support her favorite charities , and also wants to leave a portion of the assets to her son, but without the income tax burden

How it Works: Case StudyAnnuity FactsCurrent value: $272,271Basis: $187,52010 year annuity income: $31,918 (3% S/O rate)Expected return: $319,184 ($31,918 x 10 years)

Calculating the Exclusion Ratio (taxable vs. tax-free income)Investment (basis)/expected return$187,520 / $319,184 = 58.75% tax-free income58.75% x $31,918 = $18,752 tax-free income annually100% - 58.75% = 41.25% taxable income41.25% x $31,918 = $13,166 taxable income annually

How it Works: Case StudyValue of charitable life insurance with the taxable portion• L121 sample: Current dividend scale = $13,166 premium

($6,362.75 premium & $6,803.25 APO)• Total death benefit year one = $190,143• Age 90 = $272,252

Value of wealth replacement insurance with the tax-free portion• L121 sample: Current dividend scale = $18,752 Premium

($8,530.55 premium & $10,221.45 APO)• Total death benefit year one = $257,751• Age 90 = $393,823

How it Works: Case StudyThe Solution• Client eliminated tax liability on annuity by giving to charity

(LCF)• Client’s charitable goals are accomplished• Gave tax-free cash to her son upon her death• Son received more significant inheritance through this solution

The Value After Taxes$272,271 - $187,520 = $84,751 gain $84,751 x 30% tax rate = $25,425 in taxes paid$272,271 - $25,425 = Net gain after tax $246,846