Gifts of Life Insurance
There are several ways you can use life insurance as the basis for a
charitable gift.
Making the Charity a Beneficiary of Your Life Insurance Policy
You may wish to make the charity the beneficiary (or a contingent beneficiary)
of a life insurance policy as a way to make a sizeable future gift. You
retain lifetime ownership of the policy, keeping the right to cash it
in, borrow against it, and change the beneficiary. A gift of this nature
is treated much like a bequest made through your will. Because you retain
the ownership of your asset (the policy), you will not receive an income
tax charitable deduction for this future gift or for your premium payments
during your lifetime. The policy's proceeds will be included in your gross
estate, and your estate can take an estate tax charitable deduction.
Making a Gift of Your Policy
You may wish to transfer ownership of a policy to the charity, or purchase
a new policy with the charity as owner and beneficiary. If you make a
charity the owner and beneficiary of a policy, you are entitled to certain
tax advantages.
Example:
Since their children had grown up and begun lives on their own,
the Walkers decided to review their finances. They realized that some
of the insurance they carried while the children were dependent on them
was now not really needed. They decided to donate a fully paid-up policy
to charity. Their financial advisor told them that as the policy is paid-up,
they are entitled to a charitable deduction equal to the lessor of the
premiums they paid over the life of the policy or the cost of a comparable
replacement policy if purchased today.
The Walker children were very supportive of the idea. In fact, one of
their children purchased a small whole life policy and designated the
charity as the owner and irrevocable beneficiary. As a result, the annual
premiums that are paid are a charitable deduction.
Wealth Replacement Using Life Insurance
A donor may make a current gift to charity and receive a charitable
tax deduction. At the same time, the donor may purchase life insurance
to replace the donated amount or perhaps, the amount after estate tax
that the beneficiaries would have received. Depending on the circumstances,
the charitable tax savings and any life income resulting from the gift
may defray the cost of the wealth replacement insurance premiums.
Example: 
John Abbott, age 60, wants to make a gift that will ultimately be used
to purchase equipment for a charity he has supported for years, but he
is also concerned for his children and their futures. He creates a 6 percent
Charitable Remainder Unitrust for $100,000, which yields a tax savings
to him of $13,307. He then purchases a $100,000 whole life insurance policy
that will maintain his children's inheritance. His annual premium payments
are $4,500, which he pays for the first three years from his tax savings
and subsequently with the increased income from his trust.
Creating a Life Insurance Trust
You may want to set up an Irrevocable Life Insurance Trust (ILIT). An
ILIT removes the life insurance from your estate to help reduce estate
tax while providing other benefits. For example, upon one's death, the
proceeds of the life insurance policy may remain in the trust to provide
income for the surviving spouse, but stays outside of the spouse's estate
for estate tax purposes. Or, the trust could be used to distribute proceeds
to children of a previous marriage. Although ILITs can be expensive and
more complicated than owning life insurance directly, they may be an attractive
option in certain situations.
As with all matters concerning estate planning, please consult your estate
and tax specialists.
Please note, individual financial circumstances
will vary. The information on this site does not constitute legal or tax
advice. Donor stories and photographs are for purposes of illustration
only. As with all tax and estate planning, please consult your attorney
or estate specialist. All material is copyrighted and is for viewing purposes
only. Use of this site signifies your agreement with the terms
of use. The content in this Planned Giving section has been developed
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