Outstanding Planned Gift: Life Insurance

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.

8 thoughts on “Outstanding Planned Gift: Life Insurance

  1. “Making your nonprofit a beneficiary of an existing policy is easiest.”
    Definitely. It’s a very simple process, and makes sense. You can maintain the ownership, but allow proceeds, when available, to move seamlessly.

  2. I agree with Greg that the article is very informative, as well as thought provoking. I must confess that as someone who is licensed to sell life insurance, I had not thought of the policies I sell in those terms. When someone purchases an insurance policy, they are generally insuring against a specific event or expenses (death of a breadwinner, need for the surviving spouse to pay off the mortgage, need to be able to pay college tuition bills even if the breadwinner is no longer around). The term of the policy is generally tied to when those events/expenses occur. And once the tuition or mortgage is paid off, the beneficiary of the insurance policy could easily be modified (and the policy’s purpose adapted) for the benefit of a nonprofit organization. Tony’s comment about <> is often true – which is why term insurance is a better vehicle for meeting one’s insurance needs.

  3. Thank you both for demystifying and speaking plainly about life insurance as a viable legacy gift for nonprofits to promote. Too often well-meaning professional advisors speak in techno-babble about this under-utilized gifting asset, and it has the effect of driving nonprofits away from thinking they can utilize life insurance.

  4. Tony’s suggestion to highlight to donors the advantages of life insurance gifts is an excellent one. It is one of the most widely-held assets, and many policies have outlived the purpose for which they were originally purchased (e.g., to pay for a child’s college education in case of a parent’s premature death, or, similarly, to pay off a mortgage for those who were unaware of decreasing term insurance, or for “key man” insurance for a defunct business). Also, don’t overlook the gift potential from less-than-affluent donors who have group term life through their employers, and can assign you some or all of the otherwise-taxed “excess” coverage over $50,000, with no out-of-pocket cost.

    One other widely-overlooked application is to assure payment of a major pledge — another appropriate situation, incidentally, for decreasing term coverage, if scheduled payments are being made toward the pledge.

    A caution, though, on purchasing life insurance specifically for the purpose of making a charitable gift. Charities have had almost universally devastating results both financially and in donor relations, with insurance programs, for a variety of reasons, primarily failure of the policies to live up to what turned out to be unrealistic projections for variable and universal policies.

    Recommendation to use a new policy as a gift vehicle should be done on a case-by-case basis, tailored to the donor’s circumstances. And, because “persistency” (continuing to pay to keep a policy in force), is a huge problem in the industry, I would use only a one-pay or “limited-pay” policy that requires just a few annual payments to pay in full.

    Lastly, though it is something sensitive to broach, using life insurance for asset replacement, when there is a concern about the impact of a substantial gift on one’s heirs (even if not mentioned explicitly by the prospective donor), can remove a huge obstable to effecting the gift.

    There is an awful lot more to cover on the variations, possibilities and potential for life insurance in charitable giving, but I will leave that to Tony, who is obviously an enthusiastic advocate.

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