Life insurance can be an attractive way for friends of Goshen College to make a charitable gift because it is a flexible, cost-effective, and in many cases tax-advantaged way to make a major gift.
Life insurance can:
- Fund a gift commitment: If you have a life insurance policy you no longer need, you might contribute the ownership of it to Goshen College. Purchasing a new policy and naming the college as beneficiary is another consideration.
- Engage donors in making their first planned gift commitment: Some institutions are utilizing this method to engage younger donors and inspire new conversations about larger gifts.
- Be used for asset replacement: A donor can make a gift of an asset (such as real estate or appreciated securities) to a nonprofit institution and replace the value of that asset to benefit his/her heirs with a life insurance policy.
- Eliminate estate taxes: The purchase of life insurance through an irrevocable trust can eliminate the estate tax burden on the benefit amount for the decedent.
To determine how best to use life insurance as a charitable gift, we recommend the following checklist as part of an annual financial review:
Life Insurance Checklist
[ ] Do I have an up-to-date list of all my policies?
[ ] Where are my policies kept? Are they in a safe or readily available place?
[ ] Do I know what they cover and who the beneficiaries are of each policy?
[ ] Is there any reason for me to consider changing my beneficiaries?
[ ] Is my insurance still needed? All or a part of it?
[ ] Do I need additional coverage?
[ ] Is my spouse thoroughly familiar with the coverage provided by the policies?
[ ] Am I using my dividends in the best way?
[ ] Are any of my policies paid up or about to be paid up?
[ ] Is my premium payment plan (monthly, quarterly, semiannual, annual) still the best for me?
[ ] Would it be advantageous to change the ownership of my policies?
[ ] Have I borrowed against any of my policies? How much?
[ ] What is the current cash value of each of my policies?
[ ] Should I consider converting or donating any of my current policies?
[ ] Do I have clear instructions for my heirs on how to locate documents, web sites, and online passwords to successfully access life insurance policies and related information?
[ ] Have I checked with my agent to see if there is a more cost-efficient product that might replace an existing policy?
How to Make a Gift of Life Insurance
There are two basic ways to make a gift of life insurance:
- An irrevocable gift of an existing or new universal or whole life policy (permanent life insurance, not term life insurance) where you give up all ownership, or
- Naming Goshen College as the outright or contingent beneficiary for any type of policy.
Each approach has its unique advantages, as summarized below. While most states allow for a transfer of life insurance to a charitable organization, a few states may restrict such transfers. Accordingly, it is advisable that you consult with your advisor to confirm your ability to make such a transfer.
Strategy #1: Irrevocable Gift of an Existing or New Policy
In considering an irrevocable gift of life insurance for the benefit of Goshen College or another nonprofit organization, two options are available.
Gifting an existing policy: If you own excess life insurance (perhaps purchased for a reason that no longer exists), you might consider making an irrevocable gift of the policy to a charity. If complete ownership is transferred to the nonprofit and the charity is named as the beneficiary, the gift will generate an immediate charitable income tax deduction.
Gifting a new policy: You may take out a new policy and irrevocably name the nonprofit organization as the owner and the beneficiary of the insurance contract. This can be an attractive strategy if you are a younger donor, because the premium cost is usually low compared with the ultimate death benefit that will accrue to the charity upon the donor’s death. Whether you make one single premium payment for the policy or pay premiums annually, each payment produces a charitable income tax deduction.
The Benefits of an Irrevocable Gift of Life Insurance
Goshen College and its donors receive several benefits as a result of irrevocable gifts of life insurance to support our work:
- Simplicity – Giving life insurance is not complicated because the transaction is easily handled by your life insurance agent. There should be little or no legal fees with which to contend.
- Immediacy – If Goshen College is named as the beneficiary of a life insurance policy, then upon the insured’s death, life insurance proceeds are generally paid without delay; the funds can be quickly applied to the purpose(s) that you designated.
- Confidentiality – Unlike a will that is subject to probate proceedings, a gift of life insurance is not subject to public scrutiny and can be a private matter between Goshen College and the donor, if desired.
- Deductibility – As a charitable contribution, a gift of life insurance can provide you with a Federal income tax deduction if Goshen College is made the owner and the beneficiary of a policy that has a cash value. In the case of a donated policy, if the deduction amount exceeds $5,000, you must seek an independent appraisal and file a Form 8283 with your tax return. Such gifts may be deducted in an amount up to 50% of your adjusted gross income and any excess may be deducted within the next five years, subject to the same 50% limit each year. (If you retain the ownership of the policy and name Goshen College as the beneficiary, you are not entitled to an income tax charitable deduction.) There are two ways that a gift of the ownership of a policy may be deducted:
- If a fully paid-up policy is given, the amount of the charitable deduction is usually the lesser of the policy’s replacement value or the donor’s cost basis.
- If there are remaining premiums to be paid, the deduction is an amount slightly more than the policy’s cash surrender value.
- Certainty of Full Payment – Goshen College can receive the policy proceeds upon proof of death of the insured. The gift is not reduced by administrative fees or taxes. In contrast to assets passing under a donor’s will or living trust, life insurance may not be subject to claims by heirs or creditors (absent any gift found to be in fraud of creditors).
- Major Gift for Modest Cash Outlay – Although the amount to purchase life insurance may be relatively small, it can provide a major gift to Goshen College. Funds from life insurance may also enable endowment gifts that keep on giving, like scholarships, endowed chairs, programs, or facilities. For some, life insurance may be the only way to make a lasting and generous gift.
Strategy #2: Naming Goshen College or Another Charity as a Primary or Contingent Beneficiary
If you want to retain maximum flexibility, Goshen College or another charity can be named as either primary or contingent beneficiary of the policy. This will not produce an income tax charitable deduction upon the designation of the charity as beneficiary, nor will it produce an income tax deduction for subsequent payments of future premiums on the policy. But it does afford you a full estate tax charitable deduction when you die and the charity benefits. The concept of naming one’s favorite charity as a contingent beneficiary of a policy could be a good strategy for a childless married individual who wants to assure maximum protection for his or her spouse while both spouses are alive yet wants to provide a benefit to the charity if the primary beneficiary predeceases the insured or both perish in a common disaster.
A Third Strategy that Provides Immediate Benefit: Asset Replacement Through Life Insurance
Perhaps you’re interested in making a substantial charitable gift but feel constrained by family financial security goals. For some, the thought of depriving family members of inheritance or assets they might need for emergencies or unforeseen circumstances that require significant funds provides a barrier toward achieving charitable giving goals. Consequently, would-be donors lose the personal satisfaction of fulfilling their philanthropic objectives and also lose the income tax and/or estate tax savings available to those who make charitable gifts and bequests. An “asset replacement” strategy can achieve all these objectives.
As part of a comprehensive philanthropic, estate, and financial plan, it might be more advantageous to donate a highly appreciated asset, such as property or stock, to Goshen College, because you will usually be able to take a charitable deduction for the fair market or appraised value of the asset. Once the asset is in the hands of the charity, there will be no capital gains tax on the subsequent sale. You, in effect, get a double benefit – a substantial deduction and elimination of the capital gains tax. The charity receives its benefit when it might be most needed rather than having to wait. Your heirs also benefit even though these assets will no longer be available for inheritance. This is where life insurance can play an important role.
You can purchase a life insurance policy that provides your heirs with a cash payment at your death, replacing the assets given to charity. For example, if you made a charity the beneficiary of your IRA upon death, life insurance can be used to replace the value of your IRA that might have gone to other heirs and your IRA passes to the charity tax free. Additionally, if your life insurance policy is purchased and held by an irrevocable life insurance trust, the insurance proceeds can pass to your heirs free of estate taxes.
A gift of insurance provides great flexibility to meet charitable giving goals. Most donors and nonprofit organizations think of life insurance only as an asset that produces a future benefit for the nonprofit organization. However, by using the asset-replacement strategy to meet the needs of the donor’s family and the nonprofit, charitably-inclined individuals can truly get the most out of their financial, estate, and philanthropic goals.
We would be happy to provide information on the ways in which life insurance can help you achieve your objectives and at the same time support Goshen College. Please contact the advancement office for additional information on how a gift of a life insurance policy can make a difference for GC students.