Planned Giving Arrangement: Life Insurance

 In a previous blog, we introduced the concept of ‘planned giving’.  If you missed that article ‘What is Planned Giving?’ you might want to review it.  There are many reasons that your nonprofit organization or church should know a little about planned giving and how it can benefit your mission while serving your donors/members.  This is one in a series of articles discussing the ‘tools’ of planned giving. 

Most of us have a life insurance policy.  Typically we buy a policy in younger years to ‘insure’ that our family will have necessary funds to replace our earning capacity in the event of our untimely death.  If we are fortunate to live long enough, we generally see our need for insurance diminish once our children become self-sustaining and as our financial needs for retirement become assured. 

At this point in life, some people re-assess their life insurance needs.  While personal needs for life insurance are dependent upon possible new obligations, at this stage of life many folks have more insurance than was needed when they were younger.  This time of re-evaluation of one’s insurance needs is a great time to consider the possibility of using life insurance as a potential ‘planned gift’.

There are many useful estate-planning strategies that include life insurance.  For example, people whose estate is greater than the estate tax exemption or anyone considering a charitable remainder trust certainly should learn the wonderful benefits of including life insurance in their planning.  While many of these strategies may seem complex, they can be very beneficial to heirs.  If someone is in either of these circumstances, or both, it is well worth the time to discuss possibilities with a planned giving officer or your estate planning attorney.

For the purposes of this article, we are going to limit the discussion of life insurance to three very simple and straightforward techniques.

A donor can simply designate a charity as the beneficiary for all or part of the insurance proceeds.  The donor can accomplish this by completing the ‘designation of beneficiary’ form provided by the insurance company.  This is typically revocable, meaning the owner maintains ownership and control of the policy and can change the designation of beneficiary later if so desired.  As such, there would be no tax deduction for this action.

  1. A donor could designate the charity as beneficiary and give the policy to the charity, thereby relinquishing ownership and control.  If the policy is not ‘paid up’ he could continue to make payments for the premium.  Under this circumstance he would get a tax deduction for his gift, the amount would depend upon several variables.  This would be an irrevocable gift.  He should also be able to deduct his premiums for these premium payments, up to 30% of his AGI. 

  2. Similarly, a donor could designate the charity and give ownership and control of the policy to the charity.  Again, he would probably receive a tax deduction for this gift, depending upon the specifics of the type and status of insurance policy being given.  As in the previous example, this would be an irrevocable gift.  If the policy is not ‘paid up’, the donor could make contributions to the charity to pay for the premiums.  Under this circumstance, his contribution would be fully deductible up to 50% of his AGI, making this more beneficial for most donors. 

The use of life insurance in estate planning can often give a donor the means to make a larger contribution to their favored charity than they previously thought would be possible.  In addition, the use of life insurance in the planning process typically protects the bequest to heirs and even may provide a larger distribution than would have occurred otherwise. 

These examples are just a few of the many reasons life insurance is an important tool in many estate plans.  Therefore it is another reason why you, as someone concerned about securing significant gifts for your ministry, need to be conversant about life insurance as a charitable gift.