In mythology, a phoenix is a bird that rises from its ashes and symbolizes renewal. The gift of life insurance to a charity is a phoenix-like act in the sense that the proceeds from one’s passing bring renewal to the charitable purpose. That renewal is enhanced by the fact that the death benefit can be many times larger than the total premium payments. In addition, the life insurance allows the donor to make a significant gift without reducing his or her estate and depriving family members of an inheritance. The donor may also enjoy an income-tax deduction.
When contemplating a gift of life insurance, customers have three choices: naming a charity as the owner of an existing policy, naming a charity as the beneficiary of an existing policy, or setting up a new policy with the charity as owner and beneficiary. In this regard, if potential donors have excess life insurance that they no longer need, they might consider giving the policy to a charity. In doing this, the donor will be entitled to a charitable contributions deduction that is equal to the lesser of the policy’s fair market value or its cost basis. For this purpose, the fair market value of a paid-up or single-premium policy is its replacement cost or what the insurer would charge for a policy of the same amount on the date of the gift. In the case of a premium-paying policy, the value will be the interpolated terminal reserve plus any unearned premium. Any subsequent premium payments by the donor would be deductible.
If donors wanted to maintain flexibility with regard to their gifts, they could just name the charity as a beneficiary of the coverage. That way, they could change the beneficiary if they chose, but the price of that flexibility would be giving up any income-tax deduction. Further, due to having retained ownership of the coverage, the death benefit would be included in the donor’s gross estate with an offsetting estate-tax deduction.
With respect to setting the charity up as the owner and beneficiary of a new policy, there is the question of insurable interest, which is a matter of state law. In a state where the charity does not have an insurable interest, the donor might apply for the policy and then transfer it to the charity. Alternatively, where the charity is deemed to have such an interest, it can apply for the policy and pay the premiums with gifts from the donor-insured. Fortunately, those gifts of premium dollars would be income-tax deductible by the donor.
Other insurance gifts
If customers have group term life insurance through an employer, they might make a charity the beneficiary of such coverage. By doing so, the customer would avoid being taxed on the Table I cost of the coverage in excess of $50,000. This means that, without having to make any outlay, the customer would provide the charity with a death benefit. Here again, if the customer retained the right to change the beneficiary of the coverage, the death benefit would be included in the donor’s gross estate, but there would be an offsetting estate-tax deduction.
Another charitable possibility would be for a customer to purchase a cash-value policy and add a term rider to the coverage, making a charity the beneficiary of the rider. This is a simple and cost-effective way of providing for the family’s financial security while also benefiting a charity. Again, for purposes of flexibility, the customer could retain control of the coverage including the right to change beneficiaries.