LIFE INSURANCE POLICIES

Read the WARNING! first.

A life insurance policy is a contract between a person (the insured) and a life insurance company that requires the insurance company to pay a certain amount of money to a beneficiary upon the death of the insured. There are many different types of life insurance policies including term, variable, whole life, etc.

Life insurance policies are a good way to make a gift to a charitable organization. There are several methods of using a life insurance policy to make a gift. Different tax considerations are involved in the different methods.

One way of using a life insurance policy to make a gift to an institution is to name the organization as the owner and the beneficiary of an existing life insurance policy or policies. A donor receives a charitable tax deduction based upon the policy's fair market value.

Another way to make a gift is to obtain a new life insurance policy. In that case, the beneficiary will buy the policy on your life, and your tax deductible contribution will be used to pay the premium each year. Each premium you pay on a life insurance policy after giving title to the organization qualifies as a charitable deduction on your federal income tax return for the year in which the premium is paid.

If the life insurance policy has a cash value, you are also entitled to a charitable deduction on your federal income tax return for the year in which you transfer title to the organization. The amount of this deduction is approximately the cash value or the cost basis of the policy at the time, whichever is smaller.

An important use of life insurance is it ability to replace the value of an asset that has been given to an organization, most commonly, a charitable remainder trust. You can use the tax savings produced by the charitable tax deduction and your increased income to purchase and pay premiums on life insurance policies whose proceeds equal the value of the gifted property. This arrangement can serve to replace the "gifted" property and protect the interests of family members. This is sometimes referred to as a "Wealth Replacement Trust."

Although there are no tax advantages to naming an organization only as the beneficiary of either term or cash value life insurance, it is comforting to some donors to assure a gift in this way. Most charitable organizations welcome these kinds of gifts.

Life Insurance Advisor provides a nationwide network of life insurance experts providing custom quotes from the major life insurance companies.

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For assistance with a making a donation of a life insurance policy, contact us.