Life cycle

Gifts of new life insurance policies are usually targeted at middle to upper income donors in the 40-55 age group. In this age group, it is common to have individuals who have not yet built their asset base, but who have very good cash flow and/or are in their peak earning years. For gifts of pre-existing policies, almost any age group may own a paid-up policy, and each should be encouraged to donate them to charity.

Tax implications

For the donation of an existing policy, the donor is entitled to a charitable tax receipt for the cash value of the policy, plus any accumulated dividends, but minus any outstanding loans. If premiums are still being paid on the policy, the donor will receive a charitable tax receipt for any premiums subsequently paid. However, sometimes the gift of an existing policy will trigger taxable income attributable to the donor. If the cash value of the policy exceeds the donor’s basis in the policy, the donor will be required to report the difference as taxable income.

For the donation of a new policy, the donor is entitled to a charitable tax receipt for the value of the premiums as they are paid. Charitable receipts can be issued whether the donor makes payments directly to the charity or to the insurance company.

For the donation of life insurance proceeds, no donation receipt can be issued during the life of the donor, but upon the donor’s passing a charitable tax receipt for the value of the proceeds passing to the charity can be issued to the estate.

Other suggestions for gift opportunities

Stripped bonds

There are few charitable gifts that have the advantages of life insurance, i.e. leverage, and the ability to produce a large future gift from small yearly amounts. However, in cases where an insurance gift is not appropriate, the stripped bond as a gift vehicle may be may be an alternative that could be recommended. Here, the donor donates a small stripped bond each year for an amount approximating what insurance premiums might be. A series of stripped bonds with carefully chosen maturity dates purchased over the years, just as one would pay yearly premiums, will produce a very substantial future gift for the charity. In this way, a client might accomplish all the objectives they originally wished to achieve through a life insurance gift.

An immediate cash gift with wealth replacement life insurance

Donors may be reluctant to make a significant current gift, or to include the charity in their will if they are planning to pass their assets to family or other beneficiaries. In this case, suggest that the donor take out an insurance policy to replace the assets being gifted or bequeathed. This will make it possible for the donor to make the gift or bequest, and to replace the value of that gift with the proceeds from the life insurance policy. In fact, the tax savings from the gift may be large enough to support a significant portion of the life insurance premiums.

Combine an annuity with a gift of life insurance

This back-to-back or insured annuity arrangement provides a good source of income to the client, and at the same time guarantees a substantial gift to charity.

Allied Professional Checklist: Points to discuss

• Publicize the fact that a life insurance gift is an easy and uncomplicated way to make a significant future gift to the charity. The appropriate message is that life insurance is simple, understandable, and a very easy way to establish a significant gift.
• Publicize the tax savings of a gift of life insurance. Premiums paid on a policy gifted to charity are fully eligible for charitable tax credits. The use of the tax receipt greatly reduces the net cost of the policy for the donor.
• Emphasize the leverage of funds through a gift of life insurance. For just pennies a day, anyone can become a major benefactor. The appropriate message is that anyone, even a person of relatively modest means, can make a significant gift to charity.
• Encourage donors to establish a named endowment fund through a gift of life insurance. Many donors may wish to set up an endowed fund, but believe that it is beyond their capability. A life insurance gift can make their wish a reality.
• Propose that a gift of life insurance be part of a donor’s ongoing donations to the charity. If a client is considering the establishment of an endowment fund, suggest the purchase of a life insurance policy to ‘top up’ the fund in the future. Alternatively, propose that a client use the tax savings from a major gift to purchase life insurance as an additional charitable gift.
• Suggest the use of an insurance policy to fund a charitable gift annuity for a loved one. It may be advantageous for a donor to bequeath either a new, or an existing insurance policy to the charity with instructions in the will that the proceeds be used to fund a charitable annuity for the benefit of a loved one. The donor will have provided financial security to a beneficiary, while at the same time arranging a gift to the charity.
• Suggest the purchase of a joint-last-to-die policy as a way to increase the face value of their gift. By reducing the cost of the insurance, donors can buy a much larger insurance policy for the same amount of money they might have to pay for a policy on a single life.
• Suggest that a donor purchase life insurance to protect a pledge. To guarantee a pledge, certain donors may wish to purchase a life insurance policy to ensure that their charitable intent is carried to fruition. This is one of the few instances where the charitable use of term insurance is recommended. If the donor purchases a more permanent type insurance, this may result in two gifts to charity.
• Suggest they purchase life insurance on another person. With the consent of the individual, a life insurance policy may be purchased on that life to benefit a charity. This may be useful where the primary donor is uninsurable, such as a spouse purchasing a policy on the life of the other spouse, or where there is a cost advantage to purchase a policy on a younger life.
• Suggest an immediate gift with wealth replacement life insurance. Donors may be willing to donate a large capital gift if they realize that they can purchase a life insurance policy to replace the value of the donation made to their estate.

 

Benefits of Life Insurance

Benefits to the professional advisor

The sale of life insurance policies will produce commissions whether the policy itself is gifted to charity, of if the policy is used as a wealth replacement vehicle.

If an insured annuity is arranged, the advisor receives commissions for two products instead of just one.

In the case where stripped bonds are used, the advisor receives the commission on these. These may be particularly beneficial where the client undertakes a program to gift a stripped bond every year.

Benefits to the donor

The satisfaction of establishing a substantial gift to the charity will extend their personal influence beyond their lifetime.

The gift can be arranged immediately, rather than waiting until later in life to make the gift from accumulated assets.

The gift can be made on the ‘installment’ plan. It may be structured so that payments are modest, tax receiptable, and possibly completed by pledge in one to seven years. These small premiums gifted over time provide a substantial gift, without impairing the donor’s capital, or adversely affecting the financial security of loved ones.

A leveraged gift, life insurance enables the donor to make a major gift to charity at a fraction of the ultimate gift value. Relatively small contributions translate into an ‘ultimate gift’ that is many times greater than the contributions made by the donor.

Tax savings. Where the charity has been named as owner and beneficiary of the policy, premiums paid fully qualify for charitable tax receipts. In the case of a gift of life insurance proceeds, the estate receives a tax receipt for the full value of the policy.

Benefits to the charity

A life insurance gift is uncomplicated, easy to establish and easy to manage. As most donors understand life insurance, it does not require a high degree of sophistication on the part of the donor.

Life insurance can be marketed to younger donors. It allows the charity planned giving marketing program to expand beyond the traditional retired or about-to-retire prospect to a much larger prospect pool.

Life insurance can be an irrevocable gift. The charity’s interest is vested immediately. As long as the premiums are paid, the value of the gift is guaranteed by the insurance company for the full face amount.

Over time, the gift grows in value and can be a very lucrative asset for the charity. The policy can be used as collateral for loans, dividends may be cashed for current needs, or, in an emergency, the policy can be surrendered for its cash value.

The gift passes outside of the estate settlement process. The gift is received immediately upon the death of the insured, is not delayed because of the estate settlement process, and will not shrink on account of taxes, probate, or legal and administration fees.

The possibility of other gifts is opened. Life insurance gifts will often generate donations in addition to regular premium contributions. Often, the donor will consider cash gifts, gifts for endowment, or structured gifts that use life insurance in combination with other planned gifts, and, as a result will become a major benefactor.

This excerpt is from the book WELL ADVISED: A Planned Giving Reference Source for Allied Professionals. Written by best-selling authors Sherry Clodman, CFRE, and the late Dr. Edward H. Pearce, this resource guide is for every allied professional and planned giving/advisory committee. For more information, call (416) 345-9403 or visit: ehpearceconsultants.com.