The greatest advantage of a gift of life insurance is that a donor can make a substantially larger gift to charity by using life insurance than by giving any other asset. Relatively modest annual premiums mature into a substantial death benefit at the donor’s death. This is further enhanced when a charity owns the policy because of the income tax charitable deduction the donor receives.
The donor’s gift (cash to pay premiums) essentially costs less. For example, for a donor in a 30% tax bracket, a gift of $2,500 really costs $1,750 after factoring in the income tax charitable deduction.
The gift of an existing policy can be relatively “painless” to the donor in several respects. The transfer is simple; all that is required to complete the transfer is a change of ownership form. Absent a loan on the policy, the donor does not recognize income no matter how large the gain. In addition, if the donor does not intend to use the policy as a source of cash, a gift of a policy is not often perceived as a “loss” of an asset.
A charity-owned life insurance policy requires less administration by the charity than many other assets, like real estate or business interests. In addition, the charity can easily take advantage of cash values in the policy before the donor’s death by using loans or withdrawals. Both the cash value buildup and the death benefit are generally income tax-free to the charity.
The death benefit, whether from a policy owned by the charity or with the charity as beneficiary, is received by the charity without reduction for estate or income taxes and is not subject to the delays and expenses of probate. The death benefit is less likely to be contested by the donor’s beneficiaries than other assets.
Congress encourages charitable contributions by providing income tax deductions for gifts to charity. In order to take advantage of these deductions, a donor must meet certain requirements and is subject to certain limits:
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Article prepared by Northwestern Mutual with the cooperation of Paul Glowienke. Paul Glowienke is an Insurance Agent with Northwestern Mutual, the marketing name for The Northwestern Mutual Life Insurance Company (NM), Milwaukee, Wisconsin, and its subsidiaries. Paul Glowienke is a Registered Representative of Northwestern Mutual Investment Services, LLC, a subsidiary of NM, broker-dealer, and member FINRA and SIPC. Paul Glowienke is based in Newport Beach, CA. To contact Paul Glowienke, please call 949-863-5803, email at [email protected], or visit www.paulglowienke.com/.