Advanced Charitable Giving using Life Insurance

Advanced Charitable Giving using Life Insurance

As we get into the holiday season people start to feel charitably inclined, and yes you could just drop some coins with the unenthusiastic guy with a bell, give a $20 spot at church, or write a check…but what if there was a bigger bang for your proverbial buck?   Over the next couple weeks I will write about advanced gifting options, but will start with the simplest today – Life Insurance Owned by a Charity OR Life Insurance where the Beneficiary is a Charity.

Charity as Beneficiary of Your Life Insurance Policy

You can name a charity as beneficiary of existing or newly acquired life insurance policy almost as easy as you can name, well lets see me (cough cough hint hint).

Being that the beneficiary status of the charity is not permanent in nature (i.e. you can call up your insurance company at any time and change the policy beneficiary) you will not receive an income tax deduction for premiums paid.  On the other hand you may receive an Estate Tax deduction.  Remember you do not have to only worry about a Federal Estate Tax, you may have to worry about a State Estate Tax.

Naming a charity as a beneficiary of your life insurance policy is a flexible option that could greatly benefit the charity of your choice using leverage.

  • For example I pay about $20/month for $250,000 20 year Term.  Even with a 20% net return my $20/month would only equal $63,000 after 20 years.  So if I am one of those unfortunate few, that die before the age of 50, I will die knowing that my church, temple or charity got a relatively (compared to the investment) check.

Charity as beneficiary of your life insurance policy is absolutely a reason for permanent life insurance.  As you can imagine, and as the Insurance industry figured out a long time ago, I am not likely to die before the age of 50 (or really…most people aren’t likely to die before the age of 50), but I have this burning desire to help out the charity of my choice – Permanent Life Insurance.

Charity Can Own Life Insurance

This comes in two flavors

  1. Naming a charity both the owner and beneficiary of a new policy
  2. Transferring an existing policy to the charity

If you name a charity as both the owner and beneficiary of a new policy, yearly payments of premium will be income tax deductible which is a massive benefit for many, as compared to the above situation.  Well since you rarely get something for nothing, that tax deduction will cost you flexibility.  Since the charity is the owner of the policy, you can’t just change the beneficiary when your charity selection changes.

Transferring an existing policy is a great option for a policyholder who doesn’t want the policy anymore, and doesn’t exactly need any cash build up.  Remember: Since you are transferring ownership you are also transferring any cash value within the policy, if there is any.

To determine the deduction is a little more complicated.

  • If the policy is paid up the deduction is the lesser of:
    • The adjusted costs basis  or
    • The policy’s replacement value
  • If the premiums remain the deduction is equal to the valuation of the lesser of:
    • interpolated terminal reserve value (Cash value + Unearned Premiums – loans) or
    • Donor’s Adjusted basis

Again, we are losing the flexibility but getting an income deduction (of some amount), but is likely not to be an estate tax deduction (it would depend if the policy is brought back in the estate for estate tax purposes if the transferor doesn’t survive a 3 year period).   It should also be noted that any income tax deductions would be subject to normal AGI requirements.

Problems with Charity Owned Life Insurance or Charity as a Beneficiary of a Life Insurance Policy

The main problem I usually see is a a charity to be short sighted.  They need/want the cash today not tomorrow.  That being said if there are enough policyholders, odds say the charity will get that influx of cash at some point, which leads to a second problem.  The charity becomes some sort of death pool, which to put it frankly is just too weird  for some people.

Do you have any charity owned life insurance on your life? Do you name a charity as a beneficiary?

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