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Charitable Giving Using Life Insurance

Five steps show your clients how it is effective, simple and not just for the wealthy.

May 17, 2007
by Miguel Palma, CPA/PFS

Many of us have charitable objectives. We would like to repay society for the blessings we've received and, at the same time, fulfill a desire to "give back" to those who have given us so much. But many of us may feel somewhat frustrated — having the desire to make substantial gifts and yet feeling that our resources will not permit it. The common perception is that any meaningful charitable giving must be left to the wealthy. This is not necessarily so.

There is a method of giving that provides the opportunity to do far more for a charitable organization than your clients might think possible, even if their financial resources are limited. The method is charitable giving using life insurance, and it is effective, simple to accomplish and beneficial to your clients as well as their designated charity.

To begin the process, your clients need only apply for the insurance policy and pay the premiums. It is not necessary to set up a trust fund with its associated expenses, unless they want to do so. Gifts of life insurance do not require constant attention as other types of investments may require. There are a variety of ways to set-up a charitable gift using life insurance:

  • Your clients may give a gift that becomes self-completing. Life insurance can provide for a self-completing gift in the event of your death or disability.
  • Your clients may give a bequest at death. The proceeds of the policy will be paid to their charity free of any federal estate tax. This will be true whether your clients own the policy or the charity owns the policy.
  • Your clients may continue to own their policies, and name their favorite organizations as beneficiaries. If your clients are concerned that their family's circumstances may change in the future, they may name the charity as "revocable" or "contingent" beneficiary and still retain flexibility and control. The policy's proceeds will be passed free of both gift and estate taxes.
  • Your clients may give an existing policy. Your clients may have several insurance policies, each purchased at different times in their life to satisfy a specific need at that time. Some of those needs may no longer exist (e.g., home mortgage or children's education). Their gift of that policy to charity allows your clients to take an income tax deduction for the amount of the policy's fair market value (approximately the policy's cash value) in the year they transfer the policy. Any future premiums paid are also income tax deductible.
  • Your clients may give policy dividends. Life insurance policy dividends received in cash can be donated to charity. This is an easy, economical way to make charitable gifts and generate income tax savings.

Charitable giving using life insurance is both beneficial and a favored means of making charitable contributions for a number of reasons:

  • The death benefit going to your clients’ favorite charity is guaranteed as long as premiums are paid. This means that the charity will receive an amount which is fixed in value.
  • Life insurance provides an amplified gift that can be purchased on the installment plan. Through a relatively small annual cost (premium), a large benefit can be provided for your client’s charity. A large gift can be made without impairing or diluting the control of their family business interest or other investments. Assets earmarked for their family can thus be kept intact.
  • Life insurance is a self-completing gift. If your clients become disabled, the policy can remain in full force through the waiver of premium rider. Even if death occurs after only one premium payment, the charity is assured of its full gift. Additionally, the death proceeds can be received by their designated charity free of federal income and estate taxes, probate and administrative costs and delays, brokerage fees or other transfer costs.
  • Because of the contractual nature of a life insurance contract, a large gift to charity is not subject to attack by disgruntled heirs. Life insurance proceeds do not run afoul of the so-called mortmain statutes that prohibit or limit gifts made within a short time prior to death.
  • A substantial gift may be made with no attending publicity. Since the life insurance proceeds paid to charity can be arranged so that they will not be part of your client’s probate estate, the proceeds can be paid confidentially. Of course, publicity may be given if desired.

If your clients have ever wondered how they might “give something back,” or felt drawn to support a particular charity, one of the most affordable and beneficial ways, is through the use of life insurance.

Miguel Palma, CPA/PFS is a Registered Representative and Investment Adviser Representative of Equity Services, Inc. Securities and Investment advisory services are offered solely by Equity Services, Inc. Member NASD/SIPC. 30401 Agoura Road, Suite 101, Agoura Hills, CA 91301 (800) 470-5050. CPA Services are offered independently of Equity Services, Inc.