10 Top Ways to Use Life Insurance in Charitable Giving

In this scenario, the donor applies for a life insurance policy that will be paid up in five years.

The endowment is the beneficiary. The donor writes a $6,500 check to the charity every year for five years.

The company matches the $6,500 checks, meaning that the endowment gets a total of $13,000 every year.

The endowment uses $6,500 to pay the premiums on a life insurance policy. The charity then owns the life insurance policy.

Another $5,000 stays with the endowment, and the endowment spends $1,500 each year on providing scholarships.

At the end of five years, the endowment is complete, and the life insurance policy will be paid up.

When the donor passes the endowment will grow to be a super endowment.

9. Provide an up-front cash gift, and a planned gift of life insurance, with no cash out of the donor’s pocket.

This, basically, is a four-step plan:

Step 1: Use land or other assets as loan collateral.

Step 2: The lender issues a loan.

Step 3: The loan supplies cash to the charity, to fund the donor’s wishes and to set up an irrevocable life insurance trust, or ILIT, that will buy a life insurance policy.

Step 4: The collateral from the first step is released when the value of the cash value in the ILIT equals the value of the collateral.

The ILIT passes funds to the charity and to heirs.

This is sophisticated premium finance. To implement this kind of arrangement, you and your client need to collaborate a highly qualified ILIT expert.

10. Give a policy to a charity that manages a portfolio of life insurance policies and uses the policy proceeds to provide steady streams of cash for other, designated charities.

This is the newest, simplest and easiest way to donate a life insurance policy. All financial advisors should be talking about this approach with their clients.

The donor donates the policy to a specific 501(c)(3) nonprofit charity (“Charity A”) created for the benefit of other charities.

Donors choose the ultimate charity they want to support, once the policy is accepted by Charity A.

Charity A pays all costs associated with keeping the policy in force until maturity, thereby eliminating any need for the donor or the ultimate charity to pay the premiums.

Charity A also administers the policies and manages the portfolios —avoiding the need for the ultimate charity or the donor to have any administrative capabilities.

Once the donor completes giving the policy to Charity A, the donor receives a charitable income tax deduction.

Charity A puts the donor’s policy in a trust with enough other policies to achieve actuarial credibility. As the policies mature, the trust distributes money to all of the donor-designated charities, with the distributions based on the difference between the premium costs and the amount of policy benefits received.

In other words: The donors’ ultimate charities do not have to wait for their donors to die to receive distributions.

The donors’ ultimate charities receive distributions from the trust for the life of the trust, regardless of whether their particular donors are dead or alive.

This is a paradigm shift, allowing some donors to see the good works they have funded with life insurance while they are still alive.

Now that the donor is no longer paying premiums for the donated policy, the donor’s cash flow is improved.

Reasons

As you can see, life insurance offers tremendous flexibility for clients who want to include charitable gifts in their long-range financial and estate planning:

• Life insurance policy proceeds are paid in cash. Life insurance gifts generally are not subject to possible shrinkage from probate costs. Unless the death proceeds are payable to the estate, delays in settlement usually do not occur.

• A life insurance gift is convenient. Changing the owner and/or beneficiary of a life insurance policy may be simpler and more cost effective than creating a trust, making or changing a will, or arranging for other forms of giving.

• A life insurance gift is private. A life insurance policy is not a matter of public record; thus, total privacy in giving may be assured.

• A life insurance gift is economical. Under certain circumstances, the size of a person’s gift can actually be larger than the original cost.

Charitable giving and life insurance have gone hand-in-hand for many years.

If you have not been active in charitable planning, you should consider working charitable planning specialists to help clients structure life insurance gifts that can support their favorite causes.

David B. Simon is an attorney, and the co-founder and president of the Insuring A Better World Fund in Chicago. The fund helps donors use unwanted life insurance policies to support charitable causes.