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Gifts of Life Insurance
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 sizeable 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.
Creating a Life Insurance Trust
You may want to set up an Irrevocable Life Insurance
Trust (ILIT). An ILIT removes the life insurance
from your estate to help reduce estate tax while
providing other benefits. For example, upon one's
death, the proceeds of the life insurance policy
may remain in the trust to provide income for the
surviving spouse, but stays outside of the spouse's
estate for estate tax purposes. Or, the trust could
be used to distribute proceeds to children of a
previous marriage. Although ILITs can be expensive
and more complicated than owning life insurance
directly, they may be an attractive option in certain
situations.
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. 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 McMurry University by Future
Focus. Please report any problems to webmaster.
Revised: May 23, 2006.
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