Gifts of Life Insurance:

One method of direct gifting involves either the gift of an existing life insurance policy or the gift of a new policy. Life insurance provides great leverage because the ultimate tax-free benefit payable to the charity is far greater than the donor’s contributions. Depending on the age of the donor, the ultimate gift to the charity can be four to five time larger than the total cash contributions. The tax benefits of direct gifts of life insurance are only available if the entire interest in the policy is transferred. For example, the donor cannot retain the right to name or change beneficiaries.

The mechanics of such life insurance donations are straightforward. When gifting an existing policy that is no longer needed by an individual for family protection or which has been earmarked for a charitable gift, the owner and beneficiary designations are changed to name the charity. The donor is then entitled to an income tax deduction in the year of transfer equal to the lesser of the total premiums paid or the fair market value of the policy. The fair market value is the cash value or terminal reserve of the policy plus any unearned premium and outstanding dividend credits or the fair market value as determined by IRS regulations. Your insurance agent or the company can readily supply this information.

Thereafter, any future contributions transferred to the charity for any further premium payments would be income tax deductible to the donor. If the policy is paid up with no further premiums due, the fair market value would be the replacement cost of a comparable single premium policy. A typical donor can range from young married couples to retirees who desire to leave a legacy to the charity while obtaining substantial tax deductions and realizing a reduction of the estate assets which may be subject to estate taxes.

When gifting a new policy, the donor applies for the policy as the applicant, but names the charity as the owner and beneficiary. The donor gives an amount equal to the premium to the charity annually or can gift a single lump sum to purchase a single premium policy. The donor can then take a charitable income tax deduction for the premium contribution subject to certain limits of the donor’s adjusted gross income. It is important to note that premiums paid directly to the insurance company may be limited to the lower income limitations. Any deductible amount in excess of the income limitation can be carried ahead for five years.

Donors should consult with Planned Giving/Major Gifts Manager Jim LaJoie (jlajoie@mgh.org) in the Marquette General Foundation office if they wish to further discuss this type of giving plan.

Of course, as with any major charitable gift, donors should also contact their own attorney and/or tax advisor for advice regarding application of these ideas to their situation.