On September 15, The Wall Street Journal ran an advertising supplement to commemorate Life Insurance Awareness Month. September is a more holy month than I realized. I presume the 7-page supplement was paid for by the insurance companies with the ads.
I was gratified to see a small portion devoted to life insurance as a charitable gift, and I’d like to riff on that.
Life insurance is an outstanding planned gift: easy for your donors to execute; small dollars can be leveraged for a large ultimate gift (the death benefit, or a portion of it); one policy can provide for family and one or more nonprofits; you may see an increase to your net assets; and, your donors may enjoy an income tax charitable deduction.
Making your nonprofit a beneficiary of an existing policy is easiest. A donor merely asks the insurance company for a change of beneficiary form and includes you on it, noting your legal name and federal tax ID number. (You do publicize those widely, I hope.) When talking to a donor, it’s wise to acknowledge your awareness that family comes first, and also point out that one policy can leave money to loved ones and your organization. You can be named to receive 100% of the proceeds, or a family member can get, say, 70% and you get 30%.
As well, multiple nonprofits can be beneficiaries of the same policy. That comes in handy when your donor balks because they have other charities to support. You’d rather have 10 or 15 percent of something–and share with others–than 100% of nothing.
The beneficiary designation is a revocable gift: your donor can change their mind any time. For that reason, the IRS does not grant an income tax deduction.
For the donor willing to make their gift irrevocable, they can name you as policy owner. Because you’re the owner, you will get the premium notices. Along with the gift you should secure your donor’s pledge to keep making premium payments. When payment notices arrive in your office, you write a polite reminder to the donor, asking them to make payment to you and you turn around and pay the insurance company. When you send reminders, you have opportunities: thank your donor for their gift and show them the increased cash surrender value, as a reflection of the value of the gift to your organization.
Your CFO will like this: the owned policy is an addition to net assets. The ever-increasing (as long as premium payments are made) cash surrender value can be carried on your balance sheet. (Technically, it’s a restricted net asset; the restriction being the donor’s life.)
The premium payments your donor makes earn an income tax deduction because they are made on a policy owned by a charity. We’ve had clients credit and recognize those payments as an annual fund gift.
Your donor also earns an income tax deduction. If they give you an existing policy on which they are still making payments (i.e. not fully paid-up), their deduction is close to the policy’s cash surrender value. Precisely, it’s the interpolated terminal reserve, which is slightly higher than the cash surrender value. Talking to our clients’ donors, I always say they can expect their deduction to be roughly the cash surrender value, and they need to consult their tax advisor. Deduction limitations apply.
If the gift to you is a fully paid-up policy, meaning premium payments are no longer due, the deduction is the lesser of replacement value and cost basis. Replacement value is what it will cost to buy a comparable policy in the market and cost basis is the stream of payments the donor made over the policy’s life. Again, advise your donor to talk to their tax professional.
Life insurance makes a great planned gift. Go out and get some for your nonprofit.