Providing financial support to charitable organizations is now more important than ever because of the economic condition of our country. It’s imperative that all non-profit organizations diversify their fund development strategies to ensure sustainability. And right upfront here I’d like to thank Rodney Smith over at Helping Hands for Freedom for helping put this 2-part blog together. You can learn more about Rodney and his work with helping military families of the fallen, wounded and deployed by clicking the link.
GIFTING LIFE INSURANCE POLICIES – WHY IT MAKES SENSE
Gifting life insurance policies provides non-profits with a valuable charitable component when “gifted” correctly. While cash and marketable securities certainly help sustain an organization’s operations, planned gifts can be funded with many different types of assets, including life insurance. The general sentiment in the charitable community toward these types of gifts tends to be less than enthusiastic, as waiting for a person to pass before the “gift” is received “presses the pause button” so to speak on a charity’s bottom line. But there are many useful strategies for incorporating life insurance into a charitable estate plan, and these strategies should not be ignored.
In regards to non-profits, life insurance is not an investment. It’s a risk-management tool, and provides a death benefit to the organization if a donor-client dies prematurely. Life insurance in charitable estate planning makes perfect economic and practical sense for a number of situations, depending on a donor’s goals, existing assets and health status. One of the following three giving options tends to be the most effective:
1. Purchase of a new policy. If your client is healthy and can pass an insurance physical, he or she may wish to purchase a new life insurance policy, for the benefit of one or more charitable organizations. The death benefit can fund a special project or endow the donor’s lifetime gifts forever. Think of it in terms of “key person” insurance coverage on a valuable donor.
Does it make sense to buy a new policy solely for use as a charitable gift? Maybe, if there’s a risk that the donor’s services and support would be lost to the charitable organization before typical mortality or before a traditional investment account could build up enough value to sustain itself. But there is a “crossover” point where the charitable organization’s own investments will eventually outperform the insurance policy, and that must be taken into account.
The organization may prefer your client make annual gifts instead of purchasing an insurance policy, assuming its endowed investments will outperform the insurance company’s policy projections. To cut through the analysis, the first step is to ascertain whether this policy is being treated as an “investment.” Many insurance agents forget that the wealth-building tax advantages of an insurance-wrapped investment won’t apply to a tax-exempt 501(c)(3) organization. At a certain point, the tax-exempt charitable organization may more efficiently invest the same premium dollars in its endowment fund and generate a greater impact.
If, however, the gifted life insurance policy is placed instead as “key donor” coverage, then the risk covered is that of the donor dying prematurely. In this case, the life insurance coverage becomes a practical charitable solution.
Few policies, however, actually perform as investment projections predict. Interest rates, crediting levels, and mortality expenses change, and this variability is often forgotten after the policy is purchased. To avoid relying on projections, annual reviews of a charitable organization’s insurance portfolio should be conducted by an objective analyst, ensuring policies are performing as designed. If they deviate significantly, then decisions must be made to preserve the value by reducing the death benefit, increasing the premium payments, or, if the organization chooses, surrendering the policy.
From an income tax perspective, a newly-purchased policy should be owned from inception by the charitable organization, assuming any insurable interest issues are properly addressed. Your donor (and oftentimes his or her spouse) will be the insured. In most cases, the donor will make the premium payment directly to the charitable organization, which then pays the premium to the insurance company. The donor will be able to deduct the amount of the premium as an income tax charitable deduction.
We’ll go over the other two options next week in the 2nd part of this entry…
