Life insurance proceeds may boost charitable giving ability

While many donors give in order to help charities carry out their missions, tax savings are an added benefit. For those who are inclined to give but wonder how donations can be maximized, life insurance should be considered.

Life insurance is an affordable way to make substantial charitable gifts and can be used in a variety of ways to meet charitable objectives.

Here are a few of the benefits:

Larger donations. The death benefit of a life insurance policy is a much larger amount than the premiums paid, so ultimately, more can be given to charity.

Access to cash values. A charity-owned policy allows the organization to access and use cash values accumulated in the donated policy as needed.

Shared tax benefits. With proper ownership arrangements, the life insurance death benefit is not subject to estate tax or income tax. Charities receive proceeds on a tax-free basis upon the donor’s death or when the policy matures.

Avoiding probate. Death benefits are transferred without the delay and cost of probate court. The contractual nature of life insurance also dissuades disgruntled heirs from protesting.

Gifting life insurance allows donors to make contributions they might not otherwise be able to give comfortably within their lifetimes. There are numerous ways to structure the ownership of life insurance policies for charitable gifts. For example, life insurance policy proceeds could be assigned to a charitable organization. A policy also can be purchased naming a charitable organization as the owner.

One option is to simply name a charity as the primary or contingent beneficiary on an existing life insurance policy. As the owner, the donor would not receive an immediate income tax deduction, and the death benefit would be included in the donor’s estate. Estate taxes, however, are offset by an estate-tax charitable donation.

Cash dividends received from a whole life policy also can be gifted to charity.

Ownership transfers

Donating an existing life insurance policy can be an ideal use of a policy when the donor family’s insurance needs change, and the policy is no longer needed for other purposes.

To donate an existing policy, the policyowner would transfer ownership of the policy to a charity. If the policy is not paid up, it is possible that the annual dividend may be able to cover any future premiums due. If the annual dividend is not larger than the premium, the donor can continue to pay the premium for a policy owned by the charity or gift money directly to the charity to pay all or part of the premium due. In either case, the original policyowner would receive an income tax deduction equal to the lesser of the policy’s cost basis or its fair market value along with any premiums paid by the donor or to the charity to cover the premium payment.

Wealth replacement

Finally, life insurance can be an effective wealth replacement tool as part of an estate plan. If money, property or other assets are gifted to a charity, an income tax deduction may be immediately available for the charitable gift. The tax savings from the deduction can then be used to purchase a life insurance policy to replace the wealth heirs would have received from the donated assets.

Using the benefits of life insurance is an innovative way to provide meaningful, and often much greater, financial support to a favorite charity, regardless of the ownership structure. A financial representative can help you determine if gifting life insurance is appropriate and guide you through the transfer strategies and tax consequences. Working in conjunction with legal and/or tax consultants, potential donors can find solutions for their particular situations.

Aaron Tanner is a financial representative with Northwestern Mutual Financial Network in Springfield for the Northwestern Mutual Life Insurance Co. He may be reached at aaron.tanner@nmfn.com.