If you are among the many people who would like to make a sizable contribution to the charitable organization of your choice, there is a way to do so at reasonable cost. Through life insurance, an individual or family can donate what may potentially become many times the value of their contribution.
A life insurance policy can transform a small giver into a substantial donor. This can be accomplished in several ways. One way is to consider the purchase of a life insurance policy and donate it outright to charity. Depending on your age, a few hundred dollars a year in premiums could potentially return tens of thousands of dollars to the charity after your death, provided the insurance policy is kept in force.
In addition to leveraging a smaller contribution into a larger one, there may be other substantial advantages to donating life insurance. For the donor, there may be possible tax benefits. If the gift is properly structured* and you itemized deductions, you generally may receive a current federal income tax deduction for the charitable gift equal to the lesser of your basis in the policy or its fair market value. An outright gift of life insurance to a charity is typically not subject to gift tax and may carry estate tax benefits as well. Further, since a gift of life insurance is self-executing, it does not require rewriting your will. The proceeds of the policy will be paid directly and immediately to the charitable beneficiary and are not subject to probate.
For the charity, there are also benefits beyond the value of the contribution. An outright gift allows the charity, depending on the type of policy, to receive any policy dividends (this applies only to participating whole life policies and, of course, dividends are not guaranteed), and gives access to the policy’s loan and cash value.
Another option is to buy a life insurance policy and name the charity the beneficiary. In this case,
You would not receive an income tax deduction, since you still maintain an interest in the policy. However, your estate would generally be entitled to an estate tax deduction when the death benefit is paid to the charity. The charity still benefits from the leverage effect, since the death benefit has the potential of being many times greater than the amount you paid in premiums.
Still another option is to donate an existing policy to the charity. Donating a fully-paid up policy to charity, would entitle you to an income tax deduction of the lower of the premiums they paid over the life of the policy or the cost of a replacement policy, if purchased today.
In the case of uninsurability, you can purchase life insurance for a child or other loved one and donated that policy to the charity. The younger the age when the policy is bought the greater the potential return in death benefits. The potential return on this policy could be as much as 50 times its cost, depending upon when the insured dies. In fact, some families choose to spread out their gifts over many years by donating some funds now, donating insurance on their own lives and donating insurance on their children’s lives. In this way, they have the pleasure of knowing that their family will be contributing to the charity for many years to come.
A Gift That Can Be Counted On
For the charity, the use of life insurance as a gift can offer significant benefits. Not only is the amount of your donation potentially multiplied, but as a planned gift, it can be included in the future calculations of the value of the endowment. Planned gifts are especially valued as they help assure a source of future income and encourage others to give.
