This is Part 3 of a 3-part series.
Ready to assist your clients with charitable gifts of life insurance? This post describes four strategies to get you off and running. On the way, we’ll show you how to avoid lapsed policies and use securities to pay premiums.
In a previous post, we introduced charitable gifts of life insurance as a way to tap into your clients’ charitable passions. In this post, we will examine some specific techniques that can be used.
Gifts of life insurance policies fall in two categories:
- Gifts of new policies; and
- Gifts of existing policies.
Gifts of New Policies
Charities often develop giving appeals around the creation of new life insurance policies. The most direct method is a one-time gift of cash or other property to purchase a single premium policy on the life of the client. In order to avoid the client having any incidents of ownership in the policy, the charity should purchase the life insurance policy on the client’s life.
Dr. Terrie Smitheram recently received an appeal from Fillmore University regarding funding for a new Building Fund Endowment. The appeal suggests giving a lump-sum payment of $25,000 that Fillmore will use to purchase a single premium life insurance policy on Dr. Smitheram. After discussing the appeal with her life insurance agent, Dr. Smitheram gives securities valued at $25,000 which Fillmore sells to pay the insurance premium. For her gift, Dr. Smitheram will receive a charitable income tax deduction of $25,000.
As discussed in Part 1, it is necessary to know the insurable interest rules of the state where the client resides to verify that the charity has an insurable interest. In cases where the charity by law does not have an insurable interest, it may be possible for the client’s spouse to purchase the policy instead.
Tony and Lisa Farmer recently received the same appeal from Fillmore University. However, in the state where they reside, a charity does not have an insurable interest in the life of a donor. To avoid this problem, their agent has Lisa purchase a single premium life insurance policy on Tony. Once the policy is final, Lisa donates the policy to Fillmore. As a result, the Farmers will receive a charitable income tax deduction of $25,000.
Gifts of Existing Policies
Many life insurance producers perform a regular review of their clients’ insurance needs. During this review, you may find a policy that the client no longer needs. Rather than let the policy lapse, ask your client to consider charitable options that will allow the contract to stay in force.
This is exactly what happened to Joe Firestone when he reviewed the insurance needs of his client, Cal Irvine. Cal is the owner of a $1 million single premium life insurance policy for which he paid $150,000 ten years ago. The policy’s cash value today is $275,000. The policy was originally purchased to cover Cal’s obligation to a former business partner whom Cal recently bought out.
Joe asks Cal and his wife, Debra, to identify something they would like to “fix” in their community. Cal’s immediate response is to preserve the dwindling greenspace in their town. With Joe’s help, Cal assigns the policy to the local community foundation for the designated purpose of purchasing undeveloped land for city parks. Cal and Debra receive a $150,000 charitable income tax deduction for their gift based on a Qualified Appraisal.
It is also possible to transfer a non paid-up policy (i.e., one for which premiums are still owed). In this case, it is important to review the charity’s gift acceptance policy for gifts of life insurance to understand the charity’s policies and procedures with respect to the remaining premiums. Most charities will ask for a commitment from the donor to support the policy by making annual contributions equal to the premium amount. As mentioned in Part 2, the donor’s failure to do so will generally force the charity to surrender the policy or select from among the policy continuation options available in the contract (e.g. convert to a paid-up policy with a lesser face value).
Wanda Johnson is the owner of a $250,000 life insurance policy that will require annual premiums of $3,500 for the next 10 years. Wanda wants to contribute the policy to the local Children’s Museum where she is a board member. The Children’s Museum’s life insurance gift policy requires that Wanda sign a non-binding contribution agreement covering the remaining 10 years of payments. At the time of Wanda’s gift, the interpolated terminal reserve is $23,500 and the unearned premium amount is $1,400. Therefore, the amount of Wanda’s income tax deduction is $24,900, which is confirmed by a Qualified Appraisal. In addition, each premium payment Wanda makes over the next 10 years will create an income tax deduction equal to the amount of the premium payment. In accordance with the Children’s Museum’s gift policy, Wanda’s gift qualifies her to join the Director’s Circle giving society.
Gifts of life insurance can open doors to the broader charitable marketplace. Last year, total charitable giving of all types of assets (including life insurance) exceeded $350 billion—a clear indication of our nation’s charitable intent. As Cal and Wanda indicate, don’t be shy about asking your clients to give their unneeded life insurance policies to charity.
In conclusion, life insurance gifts offer many substantial benefits to clients who desire to support charitable causes. Gifts of life insurance policies are often a preferred way to leverage a client’s giving. For the nominal cost of the premium dollars, your client can create a charitable gift that magnifies their actual cash outlay. In addition, a gift of life insurance can be a powerful way for your client to participate in a favored charity’s recognition program or create a perpetual endowment.
The examples used in these blog posts are hypothetical and for educational use only. The situations, tax rates, or return numbers do not represent any actual clients or investments. This is not an offer of insurance. There is no assurance that the rates depicted can or will be achieved. Actual results will vary. Please consult with legal and tax counsel about the suitability.