Life Insurance: Cost-Effective Way To Generate Funds For Charities

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It seems silly to spend 100 cents on the dollar to make charitable gifts when a more cost-effective vehicle is available. A lower-cost alternative would preserve assets for the family and retain the upside growth potential of the assets in question.

For example, if I propose to leave $500,000 to my favorite charity at my death, should I leave $500,000 of Krispy Kreme stock or $500,000 in cash that I generated for cents on the dollar? This alternative funding preserves the Krispy Kreme stockand all its future growthfor my family.

No doubt youve solved the riddle by now: Life insurance is a cost-effective way to generate “dollars at a discount” for your clients favorite charities. Its a simple, yet effective way to improve their estate plan.

For a given bequest of $500,000, life insurance is the most cost-effective vehicle to provide those funds. Conversely, for a given outlaysay $1,000 per yearlife insurance provides significant leverage to increase the funds that ultimately flow to the charity.

And since a single life policy is cost effective for this purpose, consider the enhanced leverage that a survivorship policy can provide. Survivorship also fits nicely when both spouses feel strongly about a particular charity.

Life insurance proceeds can provide a significant endowment to ones favorite charity. Such an endowment could help assure that the donors largesse is memorialized in the community for many years to follow.

Another possibility would be to gift unneeded policies to a charity. Many clients or prospects still have a small policy or two that their parents may have purchased for them when they were young. If these policies are no longer needed, it is possible to donate the policy to a charity and take an income tax deduction for the value of the policy.

Or consider naming a charity as the beneficiary of a portion of an existing policy. Keep enough proceeds in the family for final expenses and let a charity have the rest. Of course, this technique would not generate a current income tax deduction, even where the charity is named as irrevocable beneficiary, but it does direct “excess” funds to the charity.

A slightly more complex, yet still very tax-effective, approach is to gift substantially appreciated assets to a charitable remainder trust (CRT). This will avoid capital gains tax on the growth in the asset, could increase cash flow to the donor(s), will generate an immediate income tax deduction, and does something good for one or more charities.

If assets are placed irrevocably in a charitable remainder trust for tax planning purposes, it often makes sense to “re-create” all or a portion of the value of the gifted asset through life insurance. The life insurance, if substantial, can be owned by an irrevocable life insurance trust to keep the proceeds out of the insureds estate and paid for with a portion of the increased cash flow from the CRT.

Taking this concept a step further, the purchase of life insurance on the donor inside a charitable remainder unitrust (CRUT) can increase the value of the trust and therefore the payout to a child or grandchild of the donor as the income beneficiary of the CRUT.

The charity may also (if allowed by state law) purchase life insurance on key donors, officers, board members and key employees, in order to leverage up the charitys assets over time.

It is always wise planning to name a contingent beneficiary on life insurance policies in the event the primary beneficiary dies before the insured. For spouses without children, or where the children are grown and financially successful in their own right, the contingent beneficiary might be the insureds favorite charity.

Most Americans are charitably inclined. Show them how to leverage up their gifts on a cost- and tax-effective basis by using life insurance. This approach preserves their other assets and decreases the cost of the charitable bequest. It makes good sense for everyone involved.

, JD, CFP, CLU, ChFC, CFS, FLMI, is vice president, advanced sales-case design and support at Jefferson-Pilot Financial, Greensboro, N.C. He can be reached via e-mail at patrick.lang@jpfinancial.com.


Reproduced from National Underwriter Life & Health/Financial Services Edition, November 26, 2003. Copyright 2003 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.