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Life Insurance and Charitable Giving
By Michael R. Collins
You can use life insurance to make the most of a charitable gift while reducing the tax burden on your estate after your death – and possibly reducing your income tax burden while you are still alive. In addition, a gift of life insurance can allow a donor to make a more substantial contribution than otherwise would be possible.
Basically, the idea is to use a life insurance policy that pays a benefit that is much greater than the amount you actually paid in premiums. For example, say that you fund a $750,000 policy with your favorite charity as beneficiary, and say that the premium is $20,000 per year. Then say you live for 20 years after you take out the policy. In this scenario, you would pay a total of $400,000 in premiums, but your charity would collect the full $750,000. (These figures are for illustrative purposes only.)
You can use life insurance to benefit a charity in several ways. First, you can simply take out a life insurance policy and name the charity as beneficiary; you continue to pay the premium until you die, at which time the charity receives the proceeds from the policy. Under this scenario, you retain ownership of the policy. This means that you have access to any cash value the policy accrues and that you can change the beneficiary if you so desire, such as if your financial situation changes or if you decide you no longer want to benefit that charity.
You also can make a gift of an existing life insurance policy to a charitable organization and continue to pay the premiums. Or, the charity can take out a new policy on your life, and you pay the premiums. You should consult with your tax and legal advisers, but generally there are various income and/or estate tax advantages available to the donor and charity of choice.
In any of these approaches, life insurance provides the charity of your choice with cash upon your death. And cash is much easier for the charity to administer than other common bequests such as real estate or other kinds of property.
Of course, if you are considering using life insurance to benefit a charity, you should be aware that it is possible that you might live long enough that you actually will end up paying as much or even more in premiums than the policy is worth. And you also should talk to your tax or estate planner before making a decision.
At The Bensman Group, we are happy to answer your questions about any of your life insurance needs. Just contact us at 847-572-0803 or email@example.com.