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There are several ways you can use life insurance as the basis for a charitable gift.
Making the Charity a Beneficiary of your Life Insurance Policy
You may wish to make the charity the beneficiary (or a contingent
beneficiary) of a life insurance policy as a way to make a sizable future
gift. You retain lifetime ownership of the policy, keeping the right to
cash it in, borrow against it, and change the beneficiary. A gift of this
nature is treated much like a bequest made through your will. Because
you retain the ownership of your asset (the policy), you will not receive
an income tax charitable deduction for this future gift or for your premium
payments during your lifetime. The policy's proceeds will be included
in your gross estate, and your estate can take an estate tax charitable
deduction.
Making a Gift of Your Policy
You may wish to transfer ownership of a policy to the charity, or purchase
a new policy with the charity as owner and beneficiary. If you make a
charity the owner and beneficiary of a policy, you are entitled to certain
tax advantages.
Example:
Since their children had grown up and begun lives on their own, the Walkers
decided to review their finances. They realized that some of the insurance
they carried while the children were dependent on them was now not really
needed. They decided to donate a fully paid-up policy to charity. Their
financial advisor told them that as the policy is paid-up, they are entitled
to a charitable deduction equal to the lessor of the premiums they paid
over the life of the policy or the cost of a comparable replacement policy
if purchased today.
The Walker children were very supportive of the idea. In fact, one of their children purchased a small whole life policy and designated the charity as the owner and irrevocable beneficiary. As a result, the annual premiums that are paid are a charitable deduction.
Wealth Replacement Using Life Insurance
A donor may make a current gift to charity and receive a charitable tax
deduction. At the same time, the donor may purchase life insurance to
replace the donated amount or perhaps, the amount after estate tax that
the beneficiaries would have received. Depending on the circumstances,
the charitable tax savings and any life income resulting from the gift
may defray the cost of the wealth replacement insurance premiums.
Example:
John Abbott, age 67, wants to make a gift that will ultimately be used
to purchase equipment for a charity he has supported for years, but he
is also concerned for his children and their futures. He creates a 6 percent
Charitable Remainder Unitrust for $100,000, which yields a tax savings
to him of $13,307. He then purchases a $100,000 whole life insurance policy
that will maintain his children's inheritance. His annual premium payments
are $4,500, which he pays for the first three years from his tax savings
and subsequently with the increased income from his trust.
As with all matters concerning estate planning, please consult your estate and tax specialists. Click here to return to Wills and Bequests.
Please note, individual financial circumstances will vary. The information on this site does not constitute legal or tax advice. Donor stories and photographs are for purposes of illustration only. As with all tax and estate planning, please consult your attorney or estate specialist. All material is copyrighted and is for viewing purposes only. Use of this site signifies your agreement with the terms of use. The content in this Planned Giving section has been developed for Benedictine Health Foundation by Future Focus. Please report any problems to section webmaster. Revised: November 9, 2005 12:03.