Many people donate time and money each year to their favorite charities.
According to the National Center for Charitable Statistics, charitable contributions by individuals, foundations, corporations, and bequests reached $429.85B in 2014. Individuals alone made contributions of $358.38B last year. You might be asking yourself why people have given away so much of their own money. Well, some people are just charitably inclined and like the idea of supporting a cause near and dear to their heart. Others may have lost a loved one to illness and like supporting the research efforts of that organization. Either way, charitable giving not only makes the donor feel good but it also provides them with an annual tax savings.
One such way to leave a lasting legacy to your favorite charity is through the gift of life insurance. Life insurance provides the charity with a tax-free death benefit, and because the cost of life insurance is not a dollar for dollar ratio, the premium dollars spent to purchase the life insurance usually provide a far greater return in the end. You could make a donation from your estate at death; however, making a significant financial gift could reduce the amount of wealth that is transferred to your heirs. By utilizing life insurance it is possible to offer a meaningful charitable gift while still transferring most of your wealth on to your loved ones.
A cash gift to a charity may be leveraged by a life insurance policy that is owned by the charity and for which the charity is the beneficiary. For relatively small annualized premiums, a large death benefit may be provided to the charity. You can either gift the cash directly to the charity so that the charity can pay the premium or you can pay the premium directly to the insurance company. In either case, you have made a tax-deductible gift to the charity.
When you do die, you probably want to control how those things are given to the people or organizations you care most about. To ensure your wishes are carried out, you need to provide instructions stating whom you want to leave your property to, what you want them to receive, and when they are to receive it. You will of course, want this to happen with the least amount paid in taxes, legal fees, and court costs.
If you are currently making annual contributions to your favorite charity, you might consider employing the “Give Now, Give Later” strategy. By using your current annual contribution as a guideline you can continue to give some portion of your current annual donation to help fund current charitable activities and donate the balance of the current contribution to the charity for the specific purpose of paying premiums on a life insurance policy on your life. The charity as owner and beneficiary of the life insurance will receive the total death benefit and not lose any portion to estate taxes, probate, or administrative costs, which can occur with the gifting of other assets.
Where does Cash Value Life Insurance fit?
- Income tax-free death benefit protection
- Tax advantaged cash value growth potential
- Supplemental retirement cash flow, through tax advantaged withdrawals and/or loans
Advantages for the Donor
- You receive an income tax deduction for gifts of cash to a charity.
- Because of the leverage of life insurance, you may be able to provide a meaningful gift to a favorite charity at what can be a relatively low cost.
- Charitable gifts can be very rewarding since critical charitable needs are being addressed and you are giving something back to society.
Disadvantages for the Donor
- Even if your financial situation deteriorates or you become dissatisfied with the activities or policies of the charity, you can’t change the insurance policy’s beneficiary or access the policy’s cash value since the charity is the owner of the policy.
Advantages for the Charity
- The life insurance death benefit can provide a meaningful gift to the charity that may be much larger than the cash gifts it might otherwise have received from you.
- As the owner of the life insurance policy, the charity can access the policy’s cash value during your lifetime.
Disadvantages for the Charity
- It is possible that the charity might receive more money over time from cash donations, if those donations are properly invested elsewhere.
- The charity may be more interested in the immediate access to cash as opposed to a larger death benefit received years in the future.