A gift of life insurance presents donors with an opportunity to make a significant future gift to benefit a charity, while enjoying current and/or future tax savings. It is an economical way to give a larger and more lasting gift at a fraction of the ultimate value from disposable income. A gift of life insurance is also an ideal way for donors to support a particular area of interest and/or program at the charity, at a level that may not be possible by any other means.

There are a number of ways that life insurance can be gifted to a charity:

1. The donation of an existing policy – Irrevocable

Many individuals have existing insurance policies and are unaware that they can make valuable gifts to a charity. To make a gift of an existing life insurance policy, the donor must irrevocably transfer ownership of the policy to the charity, and the charity must be named as the beneficiary.

The professional advisor should provide the donor with a change of ownership form. This form assigns ownership of the policy to the charity, and requires the signature of the donor, as well as the signature of one, preferably two officials of the charity. The signed form is sent to the insurance company who countersigns it, and returns it to the charity with an acknowledgement that the ownership of the policy has been transferred.

As owner of the policy, the charity files a change of beneficiary form with the insurance company that is signed by one, preferably two officials of the charity. The insurance company will countersign the form, and return it to the charity confirming that they are now the beneficiary of the policy as well.

The donor is entitled to a charitable receipt for the value of the policy. For the purposes of the receipt, the value is based on 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, if the policy is straight term insurance, or if the policy has no cash value, a charitable receipt may be given only when premiums are paid.

Usually, the charity retains the policy for the life of the donor, and receives the proceeds upon the donor’s passing. Where donors wish the charity to receive the cash value of the policy while they are alive, the charity would surrender the policy, and use the cash value for current needs or in accordance with the direction of the donor.

2. The donation of a new policy – Irrevocable

Donating a new policy is the easiest and most direct form of a life insurance gift. The donor contacts the insurance agent, and establishes a new policy on his or her life, or establishes a joint policy on the lives of a husband and wife, and names the charity as beneficiary. The insurance agent collects the initial premium, and when the policy is issued, the insurance agent assists in transferring ownership as described in (1) above.

The donor can choose to pay the premium as a lump sum, or on a monthly, or yearly schedule. Charitable receipts can be issued whether the donor makes payments directly to the charity or to the insurance company. However, if contributions are being made to the insurance company, the charity should not issue an official receipt without proof from the insurance company that the premiums have been paid.

Where appropriate, the donor can also choose a joint-last-to-die policy. A joint policy greatly reduces the cost of the insurance because it insures two lives, and the proceeds are only paid following the death of the last survivor. A joint-last-to-die policy should be recommended where the cost of the gift is an issue with the donor. In addition, it can also be used by donors who wish 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 would pay for a policy on a single life.

3. The donation of life insurance proceeds – Revocable

There are several ways to make a gift of life insurance proceeds.

Name the charity as the beneficiary. The donor signs a change of beneficiary form naming the charity as the beneficiary. In this case, no charitable receipt can be issued, but the donor has established a significant planned gift to the charity, while retaining the right to change the beneficiary in the event that circumstances are altered. Upon the passing of the donor, a charitable receipt can be issued to the donor’s estate.

Name the charity as the contingent beneficiary. The donor signs a change of beneficiary form, lists or confirms the primary beneficiary(ies), and names the charity as the contingent beneficiary, should the primary beneficiary(ies) predecease the policy holder. As indicated previously, no charitable receipt can be issued, but the donor has provided for a gift to the charity in the event of a prior death or a common disaster. In the event that the contingency actually occurs, a receipt can be issued to the estate of the policy holder.

Name your estate as beneficiary and gift the proceeds to charity. In this scenario, the donor names the estate as beneficiary of a life insurance policy, and then makes provisions in the will to bequeath an equal amount to charity. This is usually only recommended where the estate might need liquid assets. The estate will receive a donation receipt, giving rise to tax credits that can be used by the estate to reduce taxes owing at death.

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.