Life Insurance And Charitable Giving: A Timeless Mindset

No matter when you entered the business, you have seen charitable uses of life insurance go from one of the hottest planning ideas to one of the coldest and then back again.

Charitable whole life policies in the 1970s, vanishing premium universal life in the 1980s, charitable reverse split dollar in the 1990s coupled with dozens of other plans along the way made for a bumpy ride. Rather than jumping with both feet onto the bandwagon at every turn, successful charitable producers understand that successfully incorporating charitable ideas is more of a general mindset than a specific sales idea. Here are four examples of what we mean:

Charitably Enhanced Fact Finder

Too many producers miss a golden opportunity for a charitable discussion during the fact-finding process. “Do you want to leave any money to charity?” is not the correct question. Perhaps you might consider this question instead: “I know that your father was very active in your church’s mission program. If I could show you how to create a $50,000 endowment fund in his name for a cost of $50 a month, would you have any interest in creating a legacy fund like that?”

Which approach do you think is more successful? If someone chooses to increase the primary policy death benefit to incorporate this charitable legacy, what do you think that does to persistency? A simple, vastly underused concept based on a holistic charitable planning mindset.

Wealth Replacement 101

Nearly every life insurance producer who illustrates a charitable remainder trust includes a wealth replacement option whereby an Irrevocable Life Insurance Trust purchases a policy with a death benefit equaling the charitable giftor some variation thereof.

So to illustrate, if mother gives away $1 million to the charitable trust, upon her death, wealth replacement allows her heirs to receive $1 million of estate- and income-tax-free life insurance benefits. This is Wealth Replacement 101. Why is this strategy so accepted for charitable remainder trust gifts, but is almost never illustrated when a will bequest, gift annuity or retirement plan bequest is involved? These latter strategies represent over 90% of all planned gifts.

Plain Vanilla Charitable Life Insurance

A charitably inclined person can easily purchase a new policy, designating the charity as owner and beneficiary, and then make subsequent premium payments. To take it up a notch, the premium payments could be made with long term appreciated property to further enhance the tax effectiveness.

Even simpler, a donor can absolutely assign an existing policy, designate dividends to specific charities, or name a charity as a primary or contingent beneficiary on a new, existing, or group term life policy. Every one of these options may have beneficial income tax benefits, estate tax benefits, or both.

SERP Swap

A relatively new twist that could be utilized to “create” wealth that could then be shared philanthropically is the “Benefit Exchange” or “SERP Swap” concept. While most practitioners are aware of the tax problems involved in transferring qualified plan assets to heirs, few consider that nonqualified plan assets face the same decimation. However, unlike their qualified plan brethren, the rules surrounding nonqualified plans leave room to maneuver. Enter the “Benefit Exchange.”

This concept is designed for high net worth executives with no real need for the supplemental income provided through their nonqualified plan. The exchange is essentially an election by the executive to swap all or a portion of the nonqualified benefits for a split-dollar life insurance plan.

Thus, assuming the insurance is held by a third party, such as an ILIT, the benefit goes from facing both income and estate tax to a mere recognition of the applicable income from the 2001 Table (formerly PS 58). From the company’s standpoint, the exchange can be structured in a manner that results in no additional net present value cost to the company.

The tax savings, coupled with the leverage of the life insurance, creates a windfall for the executive. In our experience, it has not been unusual to see a 10- to 15-fold increase in the benefit to be received by the heirs. Thus, if the eventual benefit to the heirs was to have been $1 million, the exchange created $10 million to $15 million.

Therein lies the potential for philanthropic giving. We have just created a multi-million dollar windfall. Perhaps the executive could be persuaded to share a portion of this gain with his alma mater or favorite charity.

It seems safe to conclude it is easier to get someone to give if it costs nothing out of pocket. Clearly, any ancillary planning technique that generates additional, multiplied wealth to a family could spark a charitable discussion.

These are but four relatively timeless examples of how a producer can take a comprehensive rather than modular charitable planning approach. Some of the most successful planners in this market have gone so far as to set a specific tangible goalto create $10 million in charitable capital during your career, for example.

Maybe it is time to re-think or re-invigorate your charitable planning approach to benefit your clients and your community.

Michael J. Brink, CLU, is with the insurance advisory firm of Nease, Lagana, Eden & Culley, Inc., Atlanta, Ga., a member of the M Financial Group. You may contact Michael at mbrink@nlec.com.

Bryan K. Clontz, CFP, CLU, ChFC, AEP, is vice president of advancement at The Community Foundation for Greater Atlanta. You can e-mail Bryan at bclontz@atlcf.org.


Reproduced from National Underwriter Life & Health/Financial Services Edition, December 3, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.


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