Gifting a Life Insurance Policy to a Charity

One often-overlooked way to magnify your magnanimous charitable donation is to consider gifting an unneeded life insurance policy. Your gift can also come with some tax benefits.

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Earlier this year, Grace who is a recent widow and longtime client, found herself questioning the need of an old whole life policy. The policy had cash value of $100,000 and a death benefit of $220,000. With the passing of her husband and her two grown children financially independent, she wondered if she still needed the policy.

Should she cash it in? Leave it to her kids?

Since Grace was secure in her financial independence, and wanted to give more to charity, an option that was appealing to her both financially and philanthropically was donating the policy to her favorite charity, her local library association.

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Though gifting a life insurance policy to a qualified charity is nothing new, it is often overlooked. The advantages are several, first being the leverage or ability to magnify a gift.

Grace paid annual premiums totaling $80,000. However, what the charity will receive — the $220,000 death benefit — is almost three times what she contributed, a substantial increase and terrific use of leverage.

In addition to the leverage, there are tax benefits. Namely, once the insurance policy is irrevocably assigned to the charity, Grace receives a current income tax deduction. If Grace continues to pay the premiums via gifts to the charity, these premiums are tax deductible. Limitations will apply, so it is best to consult with an accountant or financial planner.

Finally, the death benefit is removed from Grace’s estate, and the premiums — if she continues to fund — may help keep her estate under the estate tax thresholds, so long as she dies three or more years after gifting the policy to the charity.

All in all, options abound for gifting to a charity, and one should be careful to fully analyze these options. Had Grace had a significant IRA or appreciated stocks she wanted to sell, perhaps these would have made better gifts to the charity and she could instead leave the life insurance to the kids outright or in trust.

However, under the right circumstances, namely because of the leverage mentioned earlier, donating a life insurance policy can be a great way to magnify a gift to a qualified charity.

Investment advisory and financial planning services are offered through Summit Financial LLC, an SEC Registered Investment Adviser, 4 Campus Drive, Parsippany, NJ 07054. Tel. 973-285-3600 Fax. 973-285-3666. This material is for your information and guidance and is not intended as legal or tax advice. Clients should make all decisions regarding the tax and legal implications of their investments and plans after consulting with their independent tax or legal advisers. Individual investor portfolios must be constructed based on the individual’s financial resources, investment goals, risk tolerance, investment time horizon, tax situation and other relevant factors. Past performance is not a guarantee of future results. The views and opinions expressed in this article are solely those of the author and should not be attributed to Summit Financial LLC. Links to third-party websites are provided for your convenience and informational purposes only. Summit is not responsible for the information contained on third-party websites. The Summit financial planning design team admitted attorneys and/or CPAs, who act exclusively in a non-representative capacity with respect to Summit’s clients. Neither they nor Summit provide tax or legal advice to clients. Any tax statements contained herein were not intended or written to be used, and cannot be used, for the purpose of avoiding U.S. federal, state or local taxes.

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Michael Aloi, CFP®
CFP®, Summit Financial, LLC

Michael Aloi (opens in new tab) is a CERTIFIED FINANCIAL PLANNER™ Practitioner and Accredited Wealth Management Advisor℠ with Summit Financial, LLC.  With 21 years of experience, Michael specializes in working with executives, professionals and retirees. Since he joined Summit Financial, LLC, Michael has built a process that emphasizes the integration of various facets of financial planning. Supported by a team of in-house estate and income tax specialists, Michael offers his clients coordinated solutions to scattered problems.