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The Community Foundation Blog


Charitable Planning with Life Insurance
By The Community Foundation / February 1, 2021
Charitable Planning with Life Insurance

Guest post by Jeri Turley, a Prinicipal at Winged Keel Group

Key Takeaways

  • Life insurance is an effective and convenient asset to give to a charity of your choice
  • There are various methods for making life insurance donations; each method has unique advantages.
  • Gifting a life insurance policy can reduce the donor's taxable estate.
  • Naming the charity of your choice as the beneficiary of your life insurance policy is the simplest way to provide a charity with the death benefit proceeds from a policy.

I have long admired the Albert Pike quote, “What we have done for ourselves alone dies with us; what we have done for others and the world remains and is immortal.”  As a life insurance advisor, I am often asked if charitable giving and life insurance intersect.  The answer is that life insurance has become a go-to solution for donors who want to give with lasting impact. 

A gift of life insurance can represent a substantial future gift to a charity (or charities) at relatively little cost.  Donors who wish to leverage cash donations to charity can use life insurance to accomplish their goals through a variety of strategies.  Some of the most common include:

Name a Charity as Beneficiary

If a donor has a personally owned life insurance policy they no longer need, they can name a charity as the beneficiary of the policy so that the charity will receive the policy insurance benefit.  While there are no immediate tax benefits to this approach, the value of the policy will be removed from the donor’s estate when transferred to the charity. 

Policy Donation

Policy donations provide much greater benefit to the donor and the charity.  Gifting a life insurance policy can greatly reduce the donor's taxable estate, create an income tax deduction for the donor, and perhaps most importantly, the charity will receive the entire insurance benefit of the policy upon the passing of the insured.  The donor will receive an upfront deduction, the insurance benefit will represent a multiple of the cumulative premium deposit, and premiums paid by the donor after the date of the gift are deductible. This strategy can provide a useful way to repurpose a life insurance policy that was purchased to cover a need that no longer exists. 

It is important to note that the above referenced strategies are applicable to annuities as well, and in many ways create more relative value since personally owned annuities are taxed as an IRD (Income in Respect of a Descendent) and subject to both ordinary income on accumulated gains and state tax.   Whereas if a donor named a charity as a beneficiary, the charity would receive the value income tax free and the donor would get a full deduction in their taxable estate. 

Purchase a New Policy with Charity as Owner and Beneficiary 

If a donor wishes to make a substantial future gift to a charity at a relatively low cost, another alternative is to purchase a new life insurance policy and name the charity as the owner and beneficiary. The donor arranges to pay the premiums through gifts to the charity.  This approach provides federal income tax deductions (subject to AGI limitations), and the policy proceeds are not included in the donor’s estate for estate tax purposes.  The charity will receive the insurance benefit proceeds directly. 

The bottom line is that donors who wish to leverage their cash donations to charity can use life insurance to accomplish their goals.  By either gifting a policy outright or naming a charity as beneficiary, donors can make a significant bequest to support the cause(s) they believe in with tax benefits they can enjoy during their lifetime.  Utilizing life insurance to benefit The Community Foundation is one of the simplest ways to make a significant contribution to our community and establish a legacy of giving. 

Case Study: Gifting a Life Insurance Policy to Charity

 

Client profile:

Client owns a permanent life insurance policy with a $400,000 insurance benefit.  Every year the client makes a charitable gift to her donor advised fund at the Community Foundation.  The client is concerned that when she passes, the specific nonprofits programs that she had been supporting through her fund will experience a decrease in annual funding.   

Client opportunity:

Client transfers ownership of the life insurance policy to the Community Foundation.

Client continues to make premium payments on the life insurance policy.  Because the client does this by making annual gifts to the Community Foundation, who uses the gift to make the payments themselves, the client can claim an income tax deduction on the payments.

Results:

After the client’s passing, the policy pays the $400,000 to the Community Foundation as the designated beneficiary. 

The Community Foundation places the proceeds of this payout into the client’s fund.  The fund then provides grants to the nonprofits that the client had previously earmarked.



Jeri L. Turley is a Principal at Winged Keel Group and leads the firm’s Richmond and Washington, D.C. offices, where she works closely with ultra-affluent families, their business, and their advisors throughout the wealth accumulation and wealth transfer process.  She also serves as Chair-Elect of Finseca, the leading organization for the financial security profession, on the Board of Directors of M Financial Holdings, Inc., and is a member of the Estate Planning Council of Richmond and supporter of the Greater Richmond Community Foundation. 

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