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Adding Leverage to Charitable Gifts With Life Insurance

If you are a regular donor to charity, life insurance could enable you to make a much larger gift to the good cause of your choice. Instead of making a monthly contribution to a charity, you could use the same amount of money to pay the premium on a life insurance policy to benefit the charity. Upon your death, the charity would receive the full face value of your policy. Since the policy's death benefit would most likely exceed the amount you could afford to donate during your lifetime, naming the charity as the beneficiary could eventually provide a much larger gift.

Donor Benefits, Too

In addition to the leveraging potential of gifting through life insurance, you would also receive certain income, estate, and gift tax benefits. The actual benefits you realize would depend on the type of life insurance used and how the donation is structured.

Term life insurance policies are the least expensive to purchase but involve risks that may jeopardize achieving your charitable giving goal. If the policy expired before your death, the charity you named as beneficiary wouldn't receive any proceeds. Similarly, because term insurance premiums can rise dramatically over time, premiums can eventually become prohibitively expensive. As a result, you may need to acquire new coverage in the future in order to maintain your charitable intentions. If you became uninsurable or were no longer able to afford the monthly premiums, your charity could end up with nothing. For this reason, so-called permanent policies, such as whole life, are generally more attractive for charitable giving purposes because they typically have level premiums for the life of the contract and generally don't expire if you've made all of your premium obligations.

In addition, a permanent policy has a cash value component, which can increase the range of gifting strategies.

Structuring Life Insurance Gifts

There are two basic ways of using life insurance to make charitable donations. One is to donate an existing life insurance policy to the charity. To do so, you must assign all the policy's rights to the charity and deliver the policy to the charity, giving up all control of the policy. Because the transfer of ownership is irrevocable, you obtain the full tax advantages of charitable giving. You may be able to take an income tax deduction equal to your basis or the policy's fair market value, as well as a charitable deduction for the premiums you pay. The policy will not be included in your gross estate unless you die within three years of the transfer (in which case, your estate would receive an offsetting charitable deduction).

To obtain the full tax advantages of charitable giving, you can also donate a new policy. With this strategy, you purchase a policy and pay the premiums but immediately assign all the policy's rights to the charity as well as deliver the policy to the charity. You would be entitled to take a charitable deduction for the premiums.

You may also want to consider two alternatives providing limited tax benefits. One is to name a charity as beneficiary of your policy. While this approach is simple and would still give you access to any cash value of the policy during your lifetime, its tax advantages are limited because you retain control over the policy until you die. Upon your death, the proceeds would be included in your gross estate, although the full amount of the proceeds payable to the charity would be deducted from your gross estate.

Assigning a policy's dividends to a charity is a simple-to-execute option that may be appealing if you want to pass the policy's death benefit on to your heirs. You can designate the charity to receive any of a permanent policy's dividends when you apply for a policy or at any time while you own it. While you retain control over the policy and its cash value, you also receive an income tax deduction for dividends paid to the charity. However, death benefit proceeds are included in your gross estate.

If complexity is not a concern and you are planning a substantial gift, you may want to consider using life insurance to fund a charitable remainder trust. To accomplish this sophisticated strategy, you would first enlist an attorney to create a charitable remainder trust and then purchase life insurance to fund the trust. During your lifetime, the trust would provide you with a specified amount of income. Upon your death, the principal of the trust would pass to the designated charity. In conjunction with the charitable remainder trust, you could also purchase another life insurance policy to benefit non-charitable beneficiaries, such as your spouse and children.

Stretching Your Charitable Dollars

As good as your intentions are, don't be surprised if your intended charity is not enthusiastic about receiving a gift made with life insurance. It may prefer to receive a cash donation, which it can put to use right away or invest. Indeed, if your recipient is a large charity with an investment management arm, it may decide to cash in your policy donation and invest the proceeds on the assumption that it could earn a higher rate of return than by waiting to collect the death benefit.

On the other hand, if you are donating to a smaller charity, you could point out that a life insurance gift can be preferable to alternatives, such as donating stock. Unlike stocks, whose value is subject to market changes, the amount the charity will eventually receive from life insurance is guaranteed as long as you continue paying the premiums. What's more, the amount is likely to be substantially more than you could afford to donate if you contributed cash during your lifetime.

Because state and federal tax laws are complex, it's best to discuss your situation with qualified tax and insurance professionals before deciding on the structure of a life insurance-based giving plan.


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