News & Events

Leveraging Charitable Gifts with Life Insurance

March 13, 2009

Using life insurance to make contributions to the charities of your choice can be a “win-win” for both parties. You make tax-advantaged gifts while paying on the “installment plan” with minimal impact on your estate, and the charities receive substantial gifts with a predictable value.

The basic concept

To make a charitable gift with life insurance, you, as the donor, buy a policy and designate the charity as the beneficiary. Typically, cash value, as opposed to term, life insurance is used. Because the charity is designated as the beneficiary, it immediately becomes eligible to receive cash equal to at least the face value of the policy upon your death.

Additionally, if you make the charity the owner of the policy rather than the beneficiary, the charity has access to the policy’s accrued cash value at any time. As long as the premiums are paid, the charity is assured a substantial gift.

Even modest annual contributions for the annual premium will provide the charity with a large gift. For instance, say you purchase a policy with a face value (death benefit) of $100,000 for an annual premium of $2,500. If you live for a long time after the policy goes into effect, you have essentially made a large donation in annual increments on the installment plan.

And if your life is cut short, the charity would receive a much larger donation than it would have if you had pledged a series of annual contributions that couldn’t be completed because of your death. Moreover, if the policy contains a waiver of premium rider, the policy will become fully paid up even if you become disabled.

Tax considerations

Depending on the structure of the arrangement, different tax benefits can accrue. If the life insurance policy is irrevocably given to the charity, you receive a current income tax deduction either upon the donation of an existing policy or upon each premium payment.

However, like other charitable contributions, deductions can’t exceed a certain percentage of your adjusted gross income in any given year, though excess amounts can be carried forward for up to five years. (See “AGI limitations on charitable contribution deductions” on the chart.)

If you don’t turn over the policy to the charity, your annual premiums won’t be tax deductible. But as long as the charity is the beneficiary, the proceeds will be considered a deduction for estate tax purposes. Even if you turn the policy over to the charity as owner and beneficiary, any gifts of life insurance within three years of your death will be considered part of your estate.

IRS requires substantiation

The IRS requires defensible appraisals of all charitable contributions over $5,000 other than cash or marketable securities, and this includes life insurance policies. While some of the specifics are still being debated in Washington, this is generally understood to mean that the valuation of the policy must be done by a qualified individual who isn’t the donor and not associated with either the insurance broker who sold the policy or the company that issued it.

Other benefits

Another advantage to using life insurance for charitable gifts is that it can remove an asset from your estate, thus simplifying the estate’s disposition.

Plus, though the benefit is paid at death, because it was previously funded, the insurance proceeds don’t directly deplete the amount of the estate available for distribution to heirs. This, along with the fact that the insurance policy is a legal contract, discourages heirs from challenging the validity of the gift.

Alternatively, if you wish to donate other assets to charity upon death, you could use life insurance to make up the difference for your heirs by naming them as policy beneficiaries.

Work with the pros

Using life insurance to fund charitable contributions opens up a variety of estate planning options and can be paired with other vehicles, such as trusts and family limited partnerships. However, life insurance products are often complex, the options are many, and the tax rules can be vexing. Working with an estate planning advisor is a must to attain the best outcome for you, your heirs and your designated charities.

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