In light of the financial meltdown, it is a good time to talk to the (still) wealthy about using life insurance as a financial tool for giving to charity.
For those with a private foundation, help them think about using life insurance as “asset replenishment” after the recent market storm. The idea is simple: to replenish asset losses of the foundation using life insurance on the donor’s life, thereby creating dollars not there today for real leverage tomorrow.
Life insurance potentially avails donors of new opportunities to make gifts. Today, most donors are simply thinking of how to complete gifts already made and are making few new commitments. You can help them ensure that assets that have been lost are recovered or guarantee a nice return.
Charities love planned gifts. And today they are looking for good planned giving stories to tell. Help them by exciting your clients about the power of giving life insurance. After many exotic and hyped investments failed or proved fraudulent, demonstrating the tax-free growth and returns of life insurance, a known commodity, is cool again.
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Life insurance lets donors have a real impact on, for example, their alma mater. The school would apply for, say, a $1 million life insurance policy of which the school would be both owner and beneficiary. The donor would make annual gifts of the premium to the school and take charitable deductions for doing so.
In a recent example of this strategy, my firm helped a 55-year-old man create a gift using life insurance because making a current cash gift was not an option. We suggested he determine his insurability in a preliminary underwriting test. After collecting medical records, the underwriter at our chosen carrier deemed him to be in “preferred” health. Result: He could accomplish his goal of a $1 million policy with his budget.
After full underwriting, it turned out he was “super preferred”–all the better. This created a roughly $9,500 annual premium for the policy. He examined several funding alternatives, including “pay forever” and abbreviated scenarios, and determined the pay forever was the best bet because it provided the best return on his investment.
He also wanted the policy to last until age 100 with cash value in the contract, but he did not want to fund the policy to have it endow (wherein the cash value equals the death benefit at age 100). The internal rate of return (IRR) of the contract if the donor lives to be 100 will be no less than 7%, a handsome long-term net return. Both the donor and the school were pleased–the proverbial win-win.
Issues to consider