Life insurance can be a tool with many purposes. For example, it can provide liquidity for paying taxes and other expenses at death. But, believe it or not, some of the most satisfying uses for life insurance policies are connected with charitable giving!
If you have a life insurance policy you no longer need, you might contribute it to a charitable cause in which you believe. Purchasing a new policy and naming the Amputee Coalition of America as beneficiary is another possibility. Before making a purchase of new insurance, please contact the Amputee Coalition.
At this level of family and philanthropic distributions, it is especially critical to have a skilled planning team with expertise in finance, law, taxes and insurance. The benefit of the best advice possible is well worth the cost.
Life Insurance Uses
The versatility of life insurance makes revisiting its uses a good idea, and that's what this information will help you do.
Indirect Use of Insurance for Wealth Replacement
In recent years, probably the greatest increase in using life insurance in philanthropic plans has been to replace for heirs of an estate a value being given, by one means or another, to a charitable organization like the Amputee Coalition.
A significant outright charitable gift might reduce the projected value of inheritances for family members. However, depending on the age, health and marginal income tax rate of the donor(s), income tax savings from use of the charitable deduction can be enough to purchase life insurance, whose death benefits equal the value of the gift.
Gift of an Existing Policy
You may own an insurance policy that has a substantial cash surrender value, yet the original purpose for the protection no longer applies. The policy might have been purchased initially to provide financial security for a spouse now deceased, to educate children now grown or for liquidity to pay estate taxes when liquid assets were in short supply. This policy can be a sort of hidden asset, available to be used for your philanthropic purposes.
If you choose to name the Amputee Coalition of America as the beneficiary of a policy that is not paid up and assign all incidents of ownership of the policy to us, several good things happen. You receive an immediate income tax charitable deduction for the lesser of the premiums you have paid or the "interpolated terminal reserve" value of the policy. This is similar to the cash surrender value, a figure available from the insurer.
If you itemize deductions on your tax return, your actual income tax savings depends on your marginal tax rate. A person who does not normally itemize may find the additional charitable deduction boosts his or her total itemized deductions above the standard deduction.
For a paid-up policy, the deduction is the cost of replacing the coverage with a comparable policy. In either situation, the tax deduction cannot be greater than your net investment in the policy (total premiums paid less any dividends received).
When death benefits under the policy are removed from a taxable estate, there may be a future estate tax savings if your estate otherwise would have been subject to tax.
If premiums on the policy are still payable, two options should be considered. You may stipulate that the assignment of ownership of the policy at its current value is the total charitable gift, immediately available for our use. In that case, we might surrender the policy for cash. Alternatively, we might decide to accept an amount of paid-up insurance. In either case, you are relieved of the obligation to make further premium payments.
However, an alternative may be even more attractive. The policy can remain in force so that the larger, original face amount will become your gift. You pledge to make unrestricted gifts at least annually, which we will use to pay the premiums. The gifts are deductible, and the policy is thereby kept in force with pretax instead of after-tax dollars for a lower actual cost.
A further potential advantage is to make annual gifts in the form of marketable capital gains property otherwise to be sold, such as appreciated stock. Avoidance of the capital gains tax is a second tax savings, not possible when paying premiums directly to the insurer.
Use of Beneficiary Clause as a Revocable Gift Arrangement
Other options are available if you would rather retain ownership of a policy as an asset for your own financial security or that of others. They include:
- Naming the Amputee Coalition of America as the full or partial beneficiary of the policy, with the right to change the beneficiary retained by you as owner of the policy
- Naming us as the contingent beneficiary, receiving the death benefits only if a named individual beneficiary predeceases you
- Creating a separate trust named to receive death benefits, with trust terms providing first for financial support of one or more named individuals for specific terms of years or for life, after which the trust terminates and its assets pass to us.
These plans do not produce a current income tax charitable deduction, but they can provide the satisfaction of knowing we will receive some benefits if certain events take place and the arrangement is left unchanged. Any amounts payable to us at your death will not be subject to federal estate tax.
New Policy for Future Charitable Gifts
Donors who would like to make a significant future gift to the Amputee Coalition at a relatively low cost can do so through a new life insurance policy. With increasing longevity, older persons can now purchase insurance at more affordable premium costs than were possible in the past. Retired individuals enjoying a high standard of living can use some annual discretionary income to perpetuate their support of our work, without depleting their financial reserves or reducing the projected inheritances of family members.
In most states, you can enter into a new insurance contract with a qualified charitable organization such as ours as both the beneficiary and owner of the policy. Gifts to the Coalition to cover premiums are deductible for those who itemize and can be in the form of capital gain property for a second tax savings.
What About Term Insurance?
Term insurance, such as coverage by a group policy through your employer, has no cash value, so assigning ownership would have no tax advantage.
When term coverage is provided by your employer, the cost attributable to any coverage in excess of $50,000 may be included in your taxable income. However, if we are the sole beneficiary under the policy, such cost is not included in your taxable income, nor will benefits be part of your estate.
Term insurance can be used to guarantee the payment of a substantial pledge of gifts to us payable over a period of years without potentially obligating your estate. If allowed by the policy, the term life insurance policy death benefit on you, the donor, can be reduced annually as installments are paid on the pledge, with the policy dropped when the gift is complete.
Creating an Irrevocable Life Insurance Trust
For larger amounts and multiple heirs, an irrevocable life insurance trust (also called a wealth replacement trust) may be preferable as owner of the policy, typically with a bank trust department or trust institution as trustee.
An insurance wealth replacement trust can work well in conjunction with a charitable remainder trust. When you establish a charitable remainder trust, you fund it with assets that will provide you (or another beneficiary) income for life, and then we receive the remainder. Besides the initial income tax deduction for funding the trust and the resulting tax savings, your income from reinvested trust assets is typically improved, and often it's a way to avoid capital gains tax liability. These savings free money for contributions to the trust to pay the insurance premiums.
When the trust ends, its assets pass to the Amputee Coalition of America or to more than one charitable organization in accordance with your wishes, without being subject to tax. The life insurance death benefits pass to heirs from the wealth replacement trust untaxed, having previously been transferred as annual gifts to heirs covered by gift tax exclusions, use of credits or reduced gift tax payments.
