For decades, multitudes of charities have benefitted from the wise investment choices of savvy benefactors. With thoughtful and conservative planning, donors across the world have mastered the art of leveraging smaller gifts into useful investment tools that, over time, yield much larger gifts. While there are many ways to invest for charitable purposes, there is only one vehicle that can virtually guarantee that a gift will be multiplied substantially at the donor’s death. This handy gifting tool is life insurance.
Recall that life insurance is simply a contract. It requires the payment of one or more premiums to an insurance company in exchange for a large death benefit that is paid out to the beneficiaries at the insured’s passing. Since the premiums are so small relative to the death benefit, a donor can potentially turn a modest charitable contribution into a major legacy gift that will be remembered for years to come. It may allow the donor to have the opportunity to play a key role in ensuring the longevity and success of his or her favorite charities.
Charitable giving should be done carefully and in coordination with your overall estate and wealth transfer plan. Before making a major gift, consult your legal and tax professionals.
Option 1: Donating an Existing Policy to Charity
A gift of an existing life insurance policy may greatly enhance the amount of money left to charity. Were you thinking of letting your old life insurance policy lapse because you don’t feel you need the coverage anymore? Maybe the reason you purchased the insurance originally – to assist your surviving spouse, provide funds for an education, pay off a mortgage, or help with an estate tax liability – no longer exists. Perhaps premiums have become too much of a burden for you.
Before you let your policy lapse, please consider the impact of gifting the policy to charity instead. You may discover that while your policy is now useless to you, it could be a gold mine for your charity!
The charity is responsible for any future premiums when a policy is donated, but if you continue to pay the premiums, a charitable income tax deduction might be available.
Maybe your existing policy is “paid up,” meaning that it will stay in force until your death without additional premium payments. If your gifts to family are abundant and you’d rather find another good cause to benefit from the policy, why not consider a charity? If you are already planning to leave other assets to charity at your passing, is it worthwhile leaving a life insurance policy instead? After factoring in the potential tax advantages to you as a result of your charitable gifts, it may make more sense than you think.
We suggest that you work with the planned giving director of the charity of your choice, your estate planning attorney, and a professional life insurance advisor. They should review the existing policy and determine the charitable ownership and beneficiary structure that is most appropriate given your circumstances. Typically, all that is required is some basic paperwork
Option 2: Donating Premiums for a New Policy to Benefit Charity
Suppose you make tax-deductible cash donations to your favorite charity each year. Have you thought about giving the charity permission to leverage all or a portion of your annual donation into a life insurance policy that will provide significant cash to the organization upon your passing? This could be a great way for you to become a legacy donor, enjoy the associated benefits, and help the charity build up its endowment.
For example, suppose a 55 year old man in good health was planning to make a $13,000 taxdeductible donation to his favorite charity this year. With the donor’s permission, the charity can leverage that gift into a guaranteed life insurance policy that will pay the charity $50,000 cash at the donor’s passing, whenever it occurs. If the donor is willing to make $13,000 donations for the next five years, the charity could purchase a $250,000 policy. If the donor adds his 55 year old spouse to the policy, the same $13,000 gift for five years will allow the charity to acquire a $425,000 policy that pays out at the survivor’s death, whenever it occurs.
In coordination with the planned giving director, estate planning attorney, and professional life insurance advisor, a new policy can be designed to ensure that both the donor and charity feel secure with the arrangement. The donor should have a history of giving to the charity and level of wealth to substantiate the coverage.
Note that a donor can retain ownership and name a charity as simply the beneficiary of a new or existing policy. But, no current charitable income tax deduction is allowed because the donor retains all control, including the power to change charitable beneficiaries. At death, an estate tax deduction may be available when the benefits are proceeds are paid to the charity.
It may not seem like it on the surface, but life insurance is a complex financial instrument. When considering gifts of an existing or new policy, the first step is to contact the charity’s director of planned giving.
As discussions progress, your trusted advisors, including your life insurance professional, can be brought into the conversation to work hand-in-hand with the charity and provide you with the peace of mind that comes from knowing that your plan meets your overall goals and objectives. Remember, you can arrange your affairs to benefit charity and not disinherit your family!