Life Insurance As An Alternative To Charitable Bequest

Michael C. Crawford  -  Mar 23, 2017    

The Opportunity

Many people own life insurance that they no longer need for its original purpose. For example, parents of adult children may have policies they purchased decades earlier to protect their minor children in the event of a parent’s death
When circumstances change, the owner can put a life insurance policy to other uses.
A policy owner might consider giving the policy to a favorite charity rather than surrendering it or allowing i to lapse. This way, the donor provides a significant charitable gift that doesn’t deplete the policyholder’s estate of other assets.

The Advantages

Unlike a bequest made by will, a life insurance gift avoids the costs and delays in the probate process and the administering of the estate.
The donor can make a charitable gift with life insurance that remains private. By contrast, wills go through probate and a charitable bequest included in the will is therefore part of the public record.
A charitable gift of life insurance is less likely to be contested by heirs.
With life insurance, the donor makes premium payments and the charity ends up with a substantial gift of the policy proceeds. This death-benefit-to-premiums-paid ratio typically results in a larger gift than what might be possible through other means, such as a charitable bequest of cash or other property.
A charitable gift of life insurance lets the donor retain assets intended for the heirs, such as real estate, tangible personal property or a family business.
Or, if the donor does embark specific estate assets for a favorite charity, the donor can name family members as beneficiaries of the life insurance to replace the estate assets left to the charity.

The Mechanics

Making a charitable bequest by will can involve time and legal expense. Using life insurance for giving can be simple and cost efficient. An outright gift of life insurance as an alternative to a bequest only requires the owner of an existing policy to designate the charity as the beneficiary of the policy using insurance company forms.
Some donors might not want to assign ownership of the policy outright to charity during their lifetimes. Just naming the charity as beneficiary keeps the ownership of the policy with the donor while allowing the charity to eventually benefit from the policy proceeds.
Simply naming the charity as a beneficiary won’t create an income tax charitable deduction. Bit if the charity receives the proceeds when the insured dies, the estate may take an estate tax charitable deduction for the charitable gift.

The Bottom Line

A lifetime insurance policy doesn’t necessarily lose its usefulness by outliving its original purpose. The policy can still be a valuable planning tool for persons interested in giving to charity.

The Tax Picture

An outright gift of a life insurance policy to charity offers income tax advantages that are not available by making a charitable bequest with that same policy. For example, an outright gift of an existing policy, during life qualifies for an income tax charitable itemized deduction. And, any premium payments subsequently made by the donor on the policy may also qualify for a deduction.


LIFE INSURANCE: Switching Roles

It can be a good thing when a life insurance policy outlives its original purpose. A policy originally intended to provide for minor children can be a valuable benefit once the children are grown and on their own.


One particular useful role life insurance can play is as a significant gift to a favorite charity. By naming the charity as beneficiary of an existing policy, the donor can often provide a more substantial gift that hat would have been possible using other assets.

Advantages of Life Insurance Gifts

A charitable gift of life insurance avoids the costs and delays of the probate process and the administering of the estate. By avoiding probate, the donor can make a gift that is not part of public records ( a charitable bequest is part of a will filed in probate court and available for public inspection). Another advantage is that a git that doesn’t go through probate is less likely to be contested by disgruntled heirs.

Making a charitable gift of life insurance is a simple matter of filling our insurance company forms to designate the charity as a beneficiary. In contract, a charitable bequest requires drafting and executing a valid, legal will.

The donor’s designation of the charity as beneficiary creates a substantial gift of the policy proceeds. This means that the donor makes a much larger charitable gift through insurance than through other means, such as charitable bequests.

Making a charitable gift of life insurance allows the donor to retain existing assets, such as real estate, tangible personal property or a family business interest, to give to their beneficiaries. By the same token, if such existing assets are earmarked for charitable bequests, those beneficiaries can receive life insurance benefits to replace the assets left to charity.

The material is provided for informational purposes only. Parties considering applying for our purchasing insurance and/or annuity products should seek their own tax and legal advice and should carefully review the contract. The information in thisdocument is compiled from sources considered reliable, but no representation is made regarding its completeness and accuracy.

This material in neither an offer to sell nor a solicitation of any offer to buy a security or insurance product.

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Michael C. Crawford, CFP® CLU® ChFC®

Michael Crawford of Red Bank, NJ is the Managing Director of Nationwide Wealth Management, LLC and Principal at Nationwide Valuations. For more information, please contact 888-399-5169. His expertise includes investments, Asset Allocation, Financial Planning, Insurance, High Net Worth, Peer Learning Networks, Private Placement Life Insurance, Equities and more. Michael Crawford services Red Bank NJ and surrounding areas including Middletown, NJ and NYC.

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