[ Life Insurance
inTax Planning ]
Giving a life insurance policy to a
charity — or naming a charity as a ben-
eficiary on a policy — can be a great
way for a charitably inclined client
to leverage a relatively small current
outlay into a sizable future donation.
Such a legacy could serve to restore
a depleted endowment, re-establish
curtailed services or maybe just cush-
ion the impact of the next economic
downturn. Here, I offer a look at dif-
ferent approaches to charitable giving
using life insurance.
Make the charity a beneficiary
Undoubtedly, the simplest way to
give a policy’s death benefit to a charity is to name the charity as a beneficiary. The donor will continue to own
giving, because the policy continues
to be owned and funded by the donor.
The charity also avoids the need for
ongoing policy management. On the
downside, the policy proceeds will not
be received until some unknown time
in the future. Additionally, the charity
has no control over whether the policy
is maintained for its benefit until the
insured’s death.
Note: If the policy owner discusses
his or her intentions with the planned
giving officer, many charities will add
the owner’s name to a Donor Honor
Roll at the time the beneficiary designation is made. However, the policy
owner should consider carefully any
requests to make the designation irrevocable.
eficiary. The donation should result
in a charitable deduction, subject to
the usual charitable deduction restrictions. However, as an ordinary income
asset, the policy owner will only be
entitled to a deduction for the lesser
of the policy’s fair market value and
the policy owner’s basis. In other
words, the donor will not be able to
take a deduction for donating the tax-free buildup in the policy. If the policy
requires additional premium payments
in the future, the donor can choose to
make additional tax-deductible contributions to the charity as needed.
The charity will have an ongoing
obligation to manage the in-force
policy to ensure it remains viable; a
task that is simplistic for some types
“Giving a life insurance policy to a charity — or naming a
charity as a beneficiary on a policy — can be a great way
for a charitably inclined client to leverage a relatively
small current outlay into a sizable future donation.”
the policy and make premium payments as required. At the insured’s
death, the policy death benefit will be
paid immediately in the form charities
are most fond of — cash.
There will be no current deduction
for assigning the beneficiary designation or for future premium payments.
On the other hand, the donor will continue to have all the rights of ownership, including the ability to access
cash values, add or change the beneficiaries or even surrender the policy. If
desired, the donor can name multiple
beneficiaries and can even split the
policy death benefit between family
members and the charity.
From the charity’s perspective, this
approach should not displace current
Transferring ownership of a policy
to the charity requires a more thoughtful process. At a minimum, the current policy owner must engage the
charity to be sure that it is interested
in (or capable of) owning the type of
policy being offered. A good place to
start would be the charity’s gift-accep-tance policy, which is a written statement that documents the type of gifts
a charity is willing to accept. Both
parties will need to communicate their
expectations clearly to avoid disappointment going forward.
The policy owner’s donation of
the policy irrevocably terminates all
rights and privileges as owner, includ-
ing the right to change the policy ben-
of products but can be daunting for
some other types. If the policy is paid
up on a guaranteed basis, there will be
little effort required. Policies that are
non-premium paying, based on cur-
rent assumptions for dividends or cash
values, call for more active manage-
ment; ideally, a statement of values
and in-force illustration are obtained
annually for review by a qualified in-
surance advisor. For policies requiring
additional premium, the charity will
need to secure the necessary funds.
If the original donor is not willing or
able to make additional contributions,
the charity will need to draw upon oth-
er sources of cash.
