Charitable Uses for Life Insurance Benefits
By Benjamin E. Buck
Time and time again, Americans have shown their generosity to charities– including those offering disaster relief after natural disasters. Most Americans give generously to their favorite charities, churches and local community organizations to share their good fortune each year. While we make donations because we want to help these charities carry out their missions, an added benefit is the tax savings. If you are inclined to give, but wonder how to maximize your donation, consider the gift of life insurance.
Life insurance is an affordable way to make substantial charitable gifts, and can be used in a variety of ways to meet your charitable objectives.
Here are a few of the benefits:
- Give a Larger Donation – The death benefit of a life insurance policy is a much larger amount than the premiums paid, so ultimately, you can give more to the charity.
- Access Cash Values – A charity owned policy allows the organization to access and use cash values accumulated in the donated policy as needed.
- Share Tax Benefits – With proper ownership arrangements, the life insurance death benefit is not subject to estate tax or income tax. Charities receive proceeds on a tax-free basis upon the donor’s death.
- Avoid Probate – Death benefits are transferred without the delay and cost of probate court. The contractual nature of life insurance also dissuades disgruntled heirs from protesting.
Structure of Life Insurance Gifts
Giving life insurance is a winning strategy because it allows donors to make contributions they might not otherwise be able to give comfortably within their lifetime. There are numerous ways to structure the ownership of life insurance policies for charitable gifts. For example, you could name an organization as the beneficiary of a life insurance policy, purchase a policy making the charity the owner (or name the charity the owner of an existing policy) or use the life insurance as a wealth replacement tool.
One option is to simply name a charity as the primary or contingent beneficiary on an existing life insurance policy. As the owner, you would not receive an immediate income tax deduction and the death benefit would be included in your estate. However, estate taxes are offset by an estate tax charitable deduction. Cash dividends received from a whole life policy can also be given to charity.
Over time, your family’s insurance needs may change and donating an existing life insurance policy can be an ideal use of a policy once needed for other purposes. To donate an existing policy, the policyowner transfers ownership of the policy to a charity. If the policy is not paidup, the annual dividend may cover any future premiums due. If the annual dividend is not larger than the premium, the donor can continue to pay the premium for a policy owned by the charity or give money directly to the charity to pay all or part of the premium due. In either case, the original policyowner receives an income tax deduction equal to the lesser of the policy’s cost basis or its fair market value along with any premiums paid by the donor or cash given to the charity to cover the premium payment. Finally, life insurance can be an effective wealth replacement tool as part of an estate plan. If money, property or other assets are given to a charity, the donor is entitled to an immediate income tax deduction. The tax savings from the deduction can be used to purchase a life insurance policy to replace the wealth heirs would have received.
Leaving a Legacy
Using the benefits of life insurance is an innovative way to provide meaningful, and often much greater, financial support to a favorite charity, regardless of the ownership structure. A good financial representative can help you determine if using life insurance in your charitable giving is appropriate and guide you through the transfer strategies and tax consequences. Working in conjunction with your legal and/or tax consultant, he or she can help offer solutions for your particular situation.
Article prepared by Northwestern Mutual with the cooperation of Benjamin E. Buck. Benj Buck is a Financial Representative with the Northwestern Mutual Financial Network based in Greenville, SC for The Northwestern Mutual Life Insurance Company, Milwaukee, Wisconsin.
To contact Benj, please call 864-232-2881 ext259, e-mail him at Benjamin.Buck@nmfn.com.
You can also visit his Web site at www.nmfn.com/BenjaminBuck. This article is for educational and informational purposes only. It is not intended to be used for tax advice.Tags: beneficiary, Benjamin E. Buck, cash values, charitable gifts, charitable objectives, community organizations, contractual nature, death benefit, disaster relief, free basis, good fortune, heirs, insurance life, life insurance gifts, life insurance policies, Milwaukee, natural disasters, Northwestern Mutual, replacement tool, Wisconsin