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Americans have always been known for their generosity, especially when it comes to helping others in need. For a growing number of philanthropic individuals and families, this dedication is taking on new meaning. Many are looking beyond cash gifts and focusing on other assets that offer the potential to make an even larger impact on the charities and other organizations that mean the most to them. One of the most effective and cost-effective of these is life insurance.
When properly implemented, life insurance can provide a number of attractive benefits for both you and the charitable organizations you choose , including:
1. Leveraging the amount you can pass on to charity. Life insurance allows you to make a much larger gift to charity than you might otherwise be able to give. That’s because relatively modest annual premiums mature into a substantial death benefit at the donor’s death, depending upon the donor’s health and life expectancy and the amount of premium payments.
For example, a pledge of $500,000 to your alma mater today may be overwhelming, if not impossible, for you to currently make. However, you may be able to purchase a life insurance policy in that amount and make much smaller annual donations in the form of life insurance premiums. Upon your death, the charity you selected will receive a substantial gift in your name—and neither your estate nor the charity it helped support will pay taxes on the donation.
2. Giving at a “discount.” Giving life insurance to charity also provides certain tax benefits. If you give an existing permanent life insurance policy to a charity, your income tax deduction equals the lesser of your basis in the policy or its fair market value (FMV). In addition, you also may be able to deduct ongoing premiums you pay for the policy on your annual federal income tax return. For example, for a donor in a 35 percent tax bracket, a gift of $10,000 really costs $6,500 after factoring in the income tax charitable deduction.
3. Replacing assets for your heirs. Life insurance can also be used to help “replace” for your family all or part of the value of the charitable gifts you make. When you make gifts to your favorite charities while you are alive or through a bequest, the death benefit from a life insurance policy on your life can help offset the impact of those gifts and keep the inheritance of your family members unchanged.
4. Providing a gift that can be used today. When you transfer an existing permanent life insurance policy to charity, that organization has the option to take advantage of any accumulated cash value to meet current funding requirements, preserve the full death benefit to meet future needs or a combination of the two.
How to Give Using Life Insurance
The simplest way to use life insurance is to name a charity as your policy beneficiary in whole or as a percentage. You won’t qualify for an income tax deduction on premiums paid; however, you will retain control over the policy, including access to any cash value.
This means you retain all rights to the policy, including the ability to change the beneficiary at any time. You also retain the ability to transfer the policy to the charity of your choice in the future, when you may no longer require it for your own needs. At that time, you may be able to take an income tax deduction for the lesser of your basis or the policy’s FMV.
Another option is to donate an existing insurance policy to charity. To do this, you must assign all rights in the policy to the charity, which means you give up all control of the policy forever. In exchange, you may be able to take a charitable income tax deduction for the lesser of your basis or the FMV of the policy up to certain limits. The policy would not be included in your gross estate, unless you die within three years of the transfer. In that case, your estate would be eligible for an offsetting estate tax charitable deduction.
A third choice is to use a life insurance policy in conjunction with a charitable remainder trust (CRT). You create a CRT and transfer assets to it. In return, you receive a current tax deduction for a portion of the FMV of the gifted assets (essentially the present value of what the charity is estimated to receive at the termination of the trust). You or whomever you designate as income beneficiary of the trust will also receive a series of payments based on a percentage of the trust’s assets. (Note, however, that if you name someone else to receive the annual payments from the CRT, you have made a gift to that beneficiary.) With the income from the CRT, you could then purchase a life insurance policy on your life, usually inside an irrevocable life insurance trust (ILIT), and name one or more heirs as the policy beneficiary.
At the end of the trust term (either a specified number of years or upon your death or the death of your spouse), the trust assets would pass to the charity as the CRT’s remainder beneficiary. At your death, the proceeds from your ILIT would pass income tax-free to your heirs, thereby “replacing” the assets that went to the charity.
Creating a Legacy
If you’re looking to leverage the value of your donations to charity, life insurance can provide an efficient and powerful solution for accomplishing your philanthropic goals. By either gifting a policy outright or naming a charity as beneficiary, you can provide the organizations and causes that matter most to you with a lasting legacy while keeping the inheritance of your loved ones intact.
The Northwestern MutualVoice Team is a group of professionals who share insights and opinions from experts and industry leaders across the enterprise. Our vision is to inspire others to take action and plan for their financial future through topics ranging from financial planning, retirement planning and distribution strategies, wealth accumulation and preservation, to leadership, philanthropy and innovation.
