The Financial Tool That Solves Many of Life’s Problems!


There’s more to retirement planning than simply saving money and hoping everything gets covered.  Much more is possible if you know how to use the tools.  

Few people outside the financial industry understand the power of life insurance as a planning tool.  It’s understandable:  When most people think of life insurance, the (often) typical reaction is often something like, “I don’t believe in insurance.  Those big insurance companies are just placing bets and making a lot of money.”

Of course, I refrain from asking them about their auto, homeowners, and health insurance – all insurance they actually hope they’ll never use – but, I digress.

But few people think of life insurance as a tool that actually can solve a problem!   Here’s an example:

Otto Schmidlap (if you remember that name, you’re as old as I am) purchased $25,000 of publicly-traded stock several years ago.   That stock is now worth $100,000. If Otto sells the stock, he’s staring a at a capital gains tax on the $75,000 gain.

But, if Otto donates the stock to his favorite qualified charity, he can get a $100,000 deduction on his tax returns.   Now, the charity can sell the stock and there’s no capital gains tax is due on the appreciation.

But, wait!  How about Otto’s poor heirs!  They might have inherited that $100,000!

Life Insurance:  The tool that does the job

In order to replace the value of the assets transferred to the charity, Otto establishes an irrevocable life insurance trust (ILIT) – and the trustee acquires life insurance on the Otto’s life in an amount equal to the value of the charitable gift, in this case $100,000.

How are the insurance premiums paid?  Otto, using the charitable deduction income tax savings and any annual cash flow from a charitable trust (or charitable gift annuity), makes gifts to the irrevocable life insurance trust that are then used to pay the life insurance policy premiums.   Sweet.

When Otto dies[1], the life insurance proceeds generally pass to the donor’s heirs free of income tax and estate tax, replacing the value of the assets that were given to the charity.

The charity won and the heirs were protected.  Not bad.

Try doing THAT without life insurance!  Sometimes, it IS the tool that does the job.

What do YOU want to accomplish?   If you and your spouse haven’t had a discussion about what you want your money to accomplish, click on: financial conversation checklist.  I think you’ll find it helpful.


[1] Unlike auto or homeowners insurance, life insurance (if kept in place) is ONE insurance policy that WILL be used.  And, the return to the family, compared to how much was paid-in in premiums, can be quite high – do the math for yourself!


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Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. IFG helps specializes in crafting wealth design strategies around life goals by using a proven planning process coupled with a cost-conscious objective and non-conflicted risk management philosophy.

The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.