Life insurance is most often used throughout life to provide protection and security for family members or as a retirement instrument. Life insurance is also an attractive way for friends of The Foundation for Evangelism to make a charitable gift because it is a flexible, cost-effective, and in many cases tax-advantaged way to make a major gift. Life insurance can also be used as an asset-replacement strategy. Under this strategy, a donor makes a gift of an asset (such as appreciated securities) to the nonprofit and replaces the value of that asset to benefit his/her heirs with a life insurance policy that eliminates estate taxes on the benefit amount.
To determine how best to use life insurance as a charitable gift, we recommend the following checklist as part of an annual financial review:
Life Insurance Checklist
[ ] Do I have an up-to-date list of all my policies?
[ ] Where are my policies kept? Are they in a safe, readily available place?
[ ] Do I know what they cover and who the beneficiaries are of each policy?
[ ] Is there any reason for me to consider changing my beneficiaries?
[ ] Is my insurance still needed? All, or a part of it?
[ ] Do I need additional coverage?
[ ] Is my spouse thoroughly familiar with the coverage provided by the policies?
[ ] Am I using my dividends in the best way?
[ ] Are any of my policies paid up or about to be paid up?
[ ] Is my premium payment plan (monthly, quarterly, semiannual, annual) still the best for me?
[ ] Would it be advantageous to change the ownership of my policies?
[ ] Have I borrowed against any of my policies? How much?
[ ] What is the current cash value of each of my policies?
[ ] Should I consider converting or donating any of my current policies?
If you have a life insurance policy you no longer need, you might contribute it to The Foundation for Evangelism. Purchasing a new policy and naming the Foundation as beneficiary is another possibility.
How to Make a Gift of Life Insurance
There are two basic ways to make a gift of life insurance: an irrevocable gift of a new or existing policy where the donor gives up all incidents of ownership, or by naming the nonprofit organization as the outright or contingent beneficiary of a policy. Each approach has advantages and disadvantages. Your financial advisor, attorney, and insurance agent will be of significant help to you in deciding what to do.
Irrevocable gift of an existing policy:
If a donor owns excess life insurance (perhaps purchased for a reason that no longer exists), he, she or it (if a corporation) might consider making an irrevocable gift of the policy to a charity. If complete ownership is transferred to the nonprofit and the charity is named as the beneficiary, the gift will generate a charitable income tax deduction.
If the policy is “paid up” (i.e., no premiums remain to be paid), the deduction is generally equal to the policy’s replacement value. If premiums remain unpaid on the policy, the deduction can usually be calculated based on the cash surrender value of the policy. If the donor continues to pay the premiums on the policy (either directly to the insurance company or as a gift to the nonprofit organization that pays the premium), each such payment is tax deductible as a charitable gift. In the case of a donated policy, if the deduction amount exceeds $5,000, the donor must seek an independent appraisal and file a Form 8283 with his/her tax return.
Irrevocable gift of a new policy:
A donor may take out a new policy and irrevocably name the nonprofit organization as the owner and the beneficiary of the insurance contract. This can be an attractive strategy for a younger donor, because the premium cost is usually low compared with the ultimate death benefit that will accrue to the charity upon the donor’s death. Whether the donor makes one single premium payment for the policy or pays premiums annually, each payment produces a charitable income tax deduction.
To maximize the tax advantage of this gift, the donor should consider making annual gifts of appreciated securities to the nonprofit organization, which will then make the premium payment. This will produce a charitable deduction based on the fair market value of the gift of the securities on the date the stock is transferred to the charity, and all capital gains tax that would have been paid had the securities been sold, will be avoided.
The benefits of an irrevocable gift of life insurance:
The Foundation for Evangelism and its donors receive a number of benefits as a result of gifts, such as whole life, universal life, or term life insurance to support our work. For the donor, the advantag¬es include:
1. Simplicity – Giving life insurance is not complicated because the transaction is easily handled by the donor’s life insurance agent. There should be little or no legal fees with which to contend.
2. Immediacy – If The Foundation for Evangelism is named as the beneficiary of a life insurance policy, then upon the insured’s death, life insurance proceeds are generally paid without delay to our institution; the funds can be quickly applied to the purpose(s) that the donor designated.
3. Confidentiality – Unlike a will that is subject to probate proceedings, a gift of life insurance is not subject to public scrutiny and can be a private matter between The Foundation for Evangelism and the donor, if desired.
4. Deductibility - As a charitable contribution, a gift of life insurance can provide a donor with a Federal income tax deduction if The Foundation for Evangelism is made the owner and the beneficiary of a policy that has a cash value. Such gifts may be deducted in an amount up to 50% of the donor’s adjusted gross in¬come and any excess may be deducted within the next five years, subject to the same 50% limit each year. (If the donor retains the ownership of the policy and names The Foundation for Evangelism as the beneficiary, the donor is not entitled to an income tax charitable deduction.) There are two ways that a gift of the ownership of a policy may be deducted:
a. If a fully paid-up policy is given, the amount of the charitable deduction is usually the lesser of the policy’s replacement value or the donor’s cost basis.
b. If there are remaining premiums to be paid, the deduction is an amount slightly in excess of the policy’s cash surrender value. (In technical terms, the amount is the “interpolated terminal reserve” value of the policy on the date of the gift and a proportion¬ate share of the last premium paid which covers a period beyond the contribution date.) In addition, the donor may claim a charitable deduction for the amount of the premiums paid in each succeeding year. In this instance it is more advantageous for tax purposes to send The Foundation for Evangelism a check or securities to cover payment of the premium.
5. Certainty of Full Payment – The Foundation for Evangelism can receive the policy proceeds upon proof of death of the insured. The gift is not reduced by administrative fees or taxes. In contrast to assets passing under a donor’s will or living trust, life insur¬ance may not be subject to claims by heirs or creditors.
Though the outlay to purchase life insurance may be relatively small, it can provide a major gift to The Foundation for Evangelism. For some persons, life insurance may be the only way they are able to make a lasting and generous gift.
Naming the charity as a primary or contingent beneficiary:
If the donor wants to retain maximum flexibility, The Foundation for Evangelism or another charity can be named as either primary or contingent beneficiary of the policy. This will not produce an income tax charitable deduction for the payment of future premiums on the policy, but it does afford the donor a full estate tax charitable deduction when the donor dies. The concept of naming one’s favorite charity as a contingent beneficiary of a policy could be a good strategy for a childless married individual who wants to assure maximum protection for his or her spouse while both spouses are alive, yet wants to provide a benefit to the charity if the primary beneficiary predeceases the insured or both perish in a common disaster.
Conclusion
Most donors and nonprofit organizations think of life insurance only as an asset that produces a future benefit for the nonprofit organization. However, by using the wealth-replacement strategy and/or the life settlement solution to meet the needs of the donor’s family and the nonprofit, charitably inclined individuals can truly get the most out of life.
We would be happy to provide information on the ways in which life insurance can help you achieve your objectives and at the same time support The Foundation for Evangelism. Please fill out a response online, print and mail the response card, or call us at (800) 737-8333.
