Life Insurance - Wealth Replacement can be an effective, tax beneficial way to benefit heirs in replacement of an asset redirected to charity.
- Client is insurable
- Desires to leave a portion of the estate to his/her heirs
- All other financial needs are covered by outside resources
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 typically paid on a quarterly basis, at the end of a quarter. 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 payment amount 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