We are all familiar with the purpose of Life Insurance to provide for loved ones should you suffer an untimely death. However, a current policy that you own may also be an asset to consider for a charitable gift. This could be a current as well as a future gift. It is fairly simple to accomplish. It may provide some income tax savings and, taking into consideration the value of your estate and current tax law at the time of your death, it may provide some transfer tax savings.
As we age, we may find the life insurance policies that gave us the comfort of knowing our loved ones would be provided for in the event of an untimely death are no longer needed for those original reasons. Some types of life insurance policies are designed to accumulate cash value during the life of the policy, while others (term policies) could be considered more “pay as you go” insurance coverage. A policy with cash value would more typically be considered for a charitable gift, so that is where we will focus this discussion.
As time goes by and your children age and become financially independent, you may find yourself owning a life insurance policy with some cash value built up in it that you don’t need for its original purpose. There are a couple of options you could choose as you consider using that policy to benefit your favorite charity. You should discuss with your financial advisor the options you have with your particular policy and how best to structure a gift to charity using that policy. You could change the beneficiary to name a charity near and dear to your heart while you continue paying the premiums on the policy and keeping it viable. Obviously, this would be setting up a future gift that the charity would receive upon your death. You would continue to own the policy and the cash value of that policy. Using this option would certainly be simple. It would not provide tax advantages. It provides flexibility in that you would be able to alter the beneficiary designation later should you have different feelings regarding which charity you wanted to benefit – or should your family circumstances change such that the life insurance benefit would be needed to support loved ones after your death.
Another option you could choose to use life insurance for a charitable gift would be to actually give up ownership of the policy and make the charity the owner. There could be a few advantages to this gift. Obviously, the charity could receive the death benefit upon your death. Under current law, life insurance proceeds pay to beneficiaries free of taxes, whether to charitable beneficiaries or to loved ones. However, the cash value of a life insurance policy owned by the deceased is included in the estate of that deceased person. If at the time of your death the value of your estate under the then-current tax laws were such that it would be subject to estate taxes, the cash value of that life insurance policy could add to the estate tax liability. That is where the option of gifting the ownership of the policy to the charity can be attractive for tax purposes. When you gift the policy – and therefore its cash value – to the charity, you may be eligible for an income tax charitable deduction related to the cash value. By making an irrevocable gift of the policy to the charity, you have also gotten that asset out of your estate where it would not be subject to future estate taxes.
That leaves the charity with the ownership of an insurance policy that likely will require continuing premiums to keep it viable. Typically, it would be in the best interest of the charity to keep that policy viable in order to receive the full death benefit upon the death of the insured donor. You may consider making regular financial contributions to the charity that would provide them with the necessary funds to continue making those premium payments. When you make financial donations to the charity, you may be able to claim an income tax charitable deduction each time you donate. Be sure to consult licensed tax and legal counsel regarding how to structure those gifts such that you ensure you’ve made an irrevocable gift of the policy to the charity and avoid the chance of it being pulled back into your estate as an asset potentially subject to estate taxes.
As you consider your own personal financial circumstances and how best to design your charitable giving, give some thought to life insurance policies you may have. Consider your loved ones’ present needs for life insurance benefits and whether the policies may be a source you could use as a part of your charitable giving plans. NAZCCA would welcome your gift – whether current or future – in whatever amount your heart and finances dictate. Donate Here
Bonnie Lane, Volunteer
Member, Board of Directors
NAZCCA is not licensed to give legal or tax advice and any planned giving strategies you choose to pursue should be discussed with licensed tax and legal counsel