The Use of Life Insurance in Charitable Giving

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By Thomas Hall, Agency Principal / Advanced Planning Specialist

Life Insurance has Unique Attributes — Gift Amplification

Life insurance has unique attributes that other asset classes do not possess and therefore has the potential to significantly enhance an individual’s charitable giving plan. In addition to the death benefit being tax free, life insurance also offers the opportunity to amplify (multiply) a donor’s gift. Through a relatively small annual cost (the premium), a benefit far in excess of what would otherwise be possible can be provided for charity. For example, a 50-year old committed to giving $5,000 annually for 10 years could leverage the $50,000 gift into a $200,000 gift. A second-to-die, or survivor life policy, adds even more leverage. A 50-year old couple could make a gift of $320,000 with the same $5,000 annual 10 year commitment. (Assumes 50-year old(s), preferred non-smoker(s) using a guaranteed universal life policy). This type of policy will generally yield a 5% to 6% tax free internal rate of return to life expectancy on premiums paid.


Qualified and Non-Qualified Retirement Plans — Asset Replacement Using Life Insurance

Qualified and non-qualified retirement plans are one of the best assets to give to charity because from a tax standpoint they are an inefficient in passing wealth to heirs. This asset is subject to income tax, state inheritance tax and possible federal estate taxation resulting in as much as 80% asset erosion potential for the heirs. Many donors choose to leave all or a portion of their retirement plans directly to charity and then use life insurance as a way to “replace” the wealth to their heirs. Life insurance is an excellent asset replacement tool. Remember, the death benefit is received income tax free to heirs and can be structured to be both federal and state tax free (via an irrevocable trust).

Gift or Assign Existing or New Life Insurance

Gift or absolutely assign an existing life insurance policy, donate a new life insurance policy, or have the charity purchase life insurance on the donor’s life and pay the annual premiums. Each of these methods will generate a current income tax deduction. As stated above, life insurance has the potential to amplify the gift.

Utilize a Charitable Remainder Trust (CRT)

This technique is especially useful for those donors who have highly-appreciated assets and a desire for increased income. These assets are often non-income generating and property tax-draining land or low-yielding stocks. By gifting the asset to a charitable remainder trust the potential capital gains tax is avoided and the full value of the asset is available to earn income. In addition, an immediate income tax deduction is created (based on the present value of the future interest going to the charity). A life insurance policy equal to the original gift, but owned in trust, allows the heirs to receive the full value of the assets without paying potential estate taxes. The annual premium can often be paid with the income generated from the tax deduction and/or a portion of the excess income, which results from the avoidance of capital gains movie Sherlock: The Final Problem 2017


The techniques mentions above are only a small sampling of how life insurance can be utilized in charitable giving. To determine what planning ideas would fit for a particular situation requires case-by-case planning and analysis. Without a doubt, the use of life insurance can be an essential part of any comprehensive charitable gift plan.

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