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Life Health > Life Insurance > Life Planning Strategies

10 Top Ways to Use Life Insurance in Charitable Giving

By David B. Simon

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What You Need to Know

  • Typical life insurance policies lapse without the beneficiaries ever filing a claim.
  • Your own clients might have unwanted life insurance policies.
  • Clients could use those unwanted policies to help their favorite causes.

Life insurance policyholders have $20 trillion of death benefit in force in the United States today.

The insurance industry estimates that our nation is underinsured by $12 trillion.

By any measure life insurance is a huge asset class that charities should embrace, but most do not.

Life insurance is traditionally purchased for many reasons: to provide security for loved ones; to implement a low-risk, tax-deferred savings plan; to provide funds needed for the payment of estate taxes; and for many other personal and business reasons.

Life insurance is an especially flexible planning tool that can be used to meet a variety of financial needs.

Did you know that life insurance may also be the best way to fund legacy-sized charitable gifts?

Client Questions

Ask clients the following questions to determine whether a gift of life insurance could play a significant role in their charitable giving plans.

  • Do you wish you could give more to charity?
  • Do you have a policy on your life that is no longer needed for its original purpose?
  • Do you have a policy to protect a business that no longer exists or that no longer needs such protection?
  • Are you concerned that the current life insurance premiums on a policy you own are too high?

If the answer to any of the last three questions is “yes,” then the client should consider donating the life insurance policy involved to charity.

Policy Lapsation

Although many people have unneeded life insurance, they often waste it.

There are roughly 38 million life insurance policies owned by American seniors, with a total death benefit of more than $3 trillion.

As it stands today, nearly 88% of universal life insurance policies and almost 85% of term life insurance policies never actually result in a death claim.

The number of policies lapsed by Americans over the age of 65 is staggering: More than 250,000 policies, with a combined death benefit of over $100 billion, are lapsed or surrendered back to the life insurance companies every year.

Thus, over $100 billion of life insurance is wasted each year by seniors alone.

To keep this problem from affecting your clients, help the clients check their life insurance policies and compare their coverage with their present needs.

Then consider how life insurance could be used to help the clients establish a legacy, and meet charitable goals and philanthropic ideals.

10 Paths

The following are the top 10 ways clients can give to charity using life insurance, based in part on presentations by Roy Grisham of the University of North Texas and charitable giving specialists at the U.S. Holocaust Memorial Museum.

Consider whether any of these ways to give life insurance may be an opportunity to create or enhance your clients’ legacy.

Note that each method of giving life insurance described here has advantages and disadvantages. If you yourself are not a charitable giving tax law specialist, you should work with charitable giving experts when offering clients these ideas.

1. Name a charitable recipient as beneficiary of a life insurance policy already owned by the donor.

2. Buy a new life insurance policy to donate to charity.

This can be a convenient way to make a substantial gift in an affordable and tax-efficient manner.

3. Give a paid-up life insurance policy already owned by the donor and change the owner and beneficiary to a charity.

4. Give an existing life insurance policy on which the donor is still paying premiums to a charity.

5. Buy a life insurance policy benefiting the donor’s heirs to replace money or property donated to charity. This method merits serious consideration by those who want to make significant charitable gifts without necessarily reducing what their heirs will receive. The tax savings realized as a result of a gift of cash or other property may be used to help offset the cost of insurance purchased to replace the assets donated.

6. If it is more advantageous, purchase a life insurance policy on the life of another person, such as a spouse, partner or child. This is an excellent way to give life insurance if the donor is uninsurable. Premiums are deductible when a qualified charity is named as the owner and beneficiary.

7. Take advantage of an opportunity to name something important, such as a new classroom or a new building, using cash and a life insurance policy gift.

Assume that to, make the naming, there needs to be one-third of the gift provided up front and the rest secured immediately or paid in a short period of time.

The one-third up front is done with cash.

Then use a life insurance policy to secure the balance. Use a policy where the premium is paid with fewer than 10 annual payments. The cash is, of course, tax-deductible, and so are the annual payments.

The tax savings reduces the actual cost of the gift.

But in addition, the life insurance payments can mean that the balance of the gift can be done with approximately half of the cash expenditure.

8. Help fund an endowment, or gift that generates an ongoing stream of income for a nonprofit organization, with a combination of cash, a matching gift and life insurance.

Here’s an example of a common endowment giving scenario.

The donor is 60 and wants to create a scholarship endowment. The endowment will be complete once it has $25,000 in assets.

The donor works for a company that will match gifts to higher education up to $6,500 per year.

The donor plans to work until 65.

In this scenario, the donor applies for a life insurance policy that will be paid up in five years.

The endowment is the beneficiary. The donor writes a $6,500 check to the charity every year for five years.

The company matches the $6,500 checks, meaning that the endowment gets a total of $13,000 every year.

The endowment uses $6,500 to pay the premiums on a life insurance policy. The charity then owns the life insurance policy.

Another $5,000 stays with the endowment, and the endowment spends $1,500 each year on providing scholarships.

At the end of five years, the endowment is complete, and the life insurance policy will be paid up.

When the donor passes the endowment will grow to be a super endowment.

9. Provide an up-front cash gift, and a planned gift of life insurance, with no cash out of the donor’s pocket.

This, basically, is a four-step plan:

Step 1: Use land or other assets as loan collateral.

Step 2: The lender issues a loan.

Step 3: The loan supplies cash to the charity, to fund the donor’s wishes and to set up an irrevocable life insurance trust, or ILIT, that will buy a life insurance policy.

Step 4: The collateral from the first step is released when the value of the cash value in the ILIT equals the value of the collateral.

The ILIT passes funds to the charity and to heirs.

This is sophisticated premium finance. To implement this kind of arrangement, you and your client need to collaborate a highly qualified ILIT expert.

10. Give a policy to a charity that manages a portfolio of life insurance policies and uses the policy proceeds to provide steady streams of cash for other, designated charities.

This is the newest, simplest and easiest way to donate a life insurance policy. All financial advisors should be talking about this approach with their clients.

The donor donates the policy to a specific 501(c)(3) nonprofit charity (“Charity A”) created for the benefit of other charities.

Donors choose the ultimate charity they want to support, once the policy is accepted by Charity A.

Charity A pays all costs associated with keeping the policy in force until maturity, thereby eliminating any need for the donor or the ultimate charity to pay the premiums.

Charity A also administers the policies and manages the portfolios —avoiding the need for the ultimate charity or the donor to have any administrative capabilities.

Once the donor completes giving the policy to Charity A, the donor receives a charitable income tax deduction.

Charity A puts the donor’s policy in a trust with enough other policies to achieve actuarial credibility. As the policies mature, the trust distributes money to all of the donor-designated charities, with the distributions based on the difference between the premium costs and the amount of policy benefits received.

In other words: The donors’ ultimate charities do not have to wait for their donors to die to receive distributions.

The donors’ ultimate charities receive distributions from the trust for the life of the trust, regardless of whether their particular donors are dead or alive.

This is a paradigm shift, allowing some donors to see the good works they have funded with life insurance while they are still alive.

Now that the donor is no longer paying premiums for the donated policy, the donor’s cash flow is improved.

Reasons

As you can see, life insurance offers tremendous flexibility for clients who want to include charitable gifts in their long-range financial and estate planning:

• Life insurance policy proceeds are paid in cash. Life insurance gifts generally are not subject to possible shrinkage from probate costs. Unless the death proceeds are payable to the estate, delays in settlement usually do not occur.

• A life insurance gift is convenient. Changing the owner and/or beneficiary of a life insurance policy may be simpler and more cost effective than creating a trust, making or changing a will, or arranging for other forms of giving.

• A life insurance gift is private. A life insurance policy is not a matter of public record; thus, total privacy in giving may be assured.

• A life insurance gift is economical. Under certain circumstances, the size of a person’s gift can actually be larger than the original cost.

Charitable giving and life insurance have gone hand-in-hand for many years.

If you have not been active in charitable planning, you should consider working charitable planning specialists to help clients structure life insurance gifts that can support their favorite causes.

David B. Simon (Photo: Simon)David B. Simon is an attorney, and the co-founder and president of the Insuring A Better World Fund in Chicago. The fund helps donors use unwanted life insurance policies to support charitable causes.

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