Ask the Expert Spring 2024
by Thomas A. Christensen, Jr., CPA
What types of life insurance policies can be donated to charity?
Virtually any type of life insurance policy can be donated subject to acceptance by a charitable organization. In general, there are three basic types of life insurance: temporary (term) life insurance, universal life insurance (potentially long-term life insurance) and whole life insurance (permanent insurance).
Since temporary life insurance is generally in place for a limited period, a potential outcome is that the insured outlives its term. Because of this, charitable donors of temporary life insurance should have realistic expectations regarding whether a life insurance death benefit will be paid in the future to their charitable beneficiary.
Similarly, there is potential that an insured will outlive certain types of universal life insurance (potentially long-term life insurance) depending on the longevity of the insured as compared to policy performance. A universal life insurance solution should be monitored and reviewed periodically to determine whether it is still meeting and/or is anticipated to continue to meet the charitable donor’s objectives.
Whole life insurance is meant to remain in place permanently—for an insured’s entire lifetime (hence the name “whole life”) so long as premiums are paid when due. Whole life policy premiums are generally payable for a specific number of years or to a specific age such as to age 75, or age 100, for example. Once the required scheduled premiums are made, a whole life policy typically becomes “paid-up,” at which point no additional premiums are due.
What are the benefits of donating a life insurance policy to charity?
A donor of a life insurance policy can benefit from the personal satisfaction they feel by helping others, and they may potentially receive a tax deduction. Donating a life insurance policy to a charity is a way for a donor to create a potentially larger gift than might otherwise be possible with other types of financial gifts. This is because of the potential leverage that life insurance can offer from the moment it is placed in force (e.g. the premium paid as compared to the larger life insurance death benefit).
Benefits to a charity depend on the type of life insurance and how the donation of life insurance is structured. For example, a charity can be given access to life insurance cash value while the insured is living (the living benefit of life insurance) or receive the death benefit proceeds when the insured passes away (the life insurance death benefit), or both, depending on the type of life insurance donated and the charitable objective.
What is the process for donating a life insurance policy to charity?
The donation of a new life insurance policy typically requires the insured to qualify for coverage through medical underwriting. The use of life insurance on a donor for charitable giving is complex, and is subject to both federal and state laws, including “insurable interest” laws which can vary from one state to another. An experienced and qualified life insurance agent can lead the process of applying for a new policy while working together with the donor’s legal and tax advisors to design a life insurance solution to help achieve the donor’s charitable objectives.
A lifetime gift of an existing life insurance policy typically involves a transfer of ownership of a life insurance policy from the current owner to the charity as well as changing the named beneficiary to the charity. In this case, control of the life insurance policy is transferred to the charity at the time of the change in ownership. Under this scenario, the donor may be eligible to take a charitable deduction – typically the lesser of their cost basis (e.g. premiums paid to date) in the policy or the fair market value of the policy.
An appraisal may be required to determine the fair market value of an existing life insurance policy at the time of the donor’s lifetime gift, especially if the value of the claimed deduction is $5,000 or more. The donor would typically take annual charitable deductions for any life insurance premium payments they continue to pay during their lifetime. Potential charitable deductions for the donor generally are limited based on the type of charitable organization (i.e. public charity or private foundation).
Alternatively, a simpler approach to donating a life insurance policy is to name the charity as the beneficiary of an existing life insurance policy. In this case, the ownership of the policy is retained by the donor during their lifetime. This gives the donor/owner access to any cash value in the policy and preserves their right to change the beneficiary while they are living. The donation to the named beneficiary charity would be completed at the death of the insured assuming that the life insurance policy is in force at that time. The donor’s estate would typically be eligible to take a charitable deduction at the time of the donor’s death.
When utilizing life insurance to achieve charitable goals, it is important for a donor to work with a team of professionals, including their legal and tax advisors, and an experienced and qualified life insurance professional. Careful consideration should be taken to help ensure that the life insurance solution that is implemented ultimately helps to achieve the donor’s charitable objectives.
The preceding article is a general discussion and was prepared for educational and informational purposes. Please consult with your team of professional advisors (e.g. accounting, financial, legal, insurance and tax) before implementing any specific planning strategies.
Thomas A. Christensen, Jr., CPA, is a licensed life insurance agent in Florida, a 1993 graduate of the Fisher School of Accounting at the University of Florida and a member of the UF Advisor Network. He resides with his family of Gators in the Fort Lauderdale area and can be reached at tchristensen@ft.newyorklife.com.
The UF Foundation (federal tax ID number 59-0974739) is a Florida nonprofit organization exempted from federal income tax as a 50l(c)(3) publicly supported charity. The UF Foundation does not provide legal, tax or financial advice. When considering planning matters, seek the advice of your own legal, tax or financial professionals.