CGNA: Chapter 6 - Life Insurance, Quick Take-Aways

CGNA: Chapter 6 - Life Insurance, Quick Take-Aways

Article posted in General on 7 June 2018| comments
audience: National Publication | last updated: 12 June 2018
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This article is an excerpt from Charitable Gifts of Noncash Assets, a comprehensive guide to illiquid giving by Bryan Clontz, ed. Ryan Raffin. Published by the American College of Financial Services for the Chartered Advisor in Philanthropy Program (CAP), with generous funding from Leon L. Levy. For a free digital copy, click here, and to order a bound copy from Amazon, click here.

Below are quick take-aways on gifts of life insurance. Life insurance topics are based on my article, “Charitable Gifts of Life Insurance: The Lone Ranger or Black Bart.” For quick take-aways on gifts of life insurance, see Life Insurance Quick Take-Aways. For a review based on that article, see Life Insurance Intermediate. For an in-depth examination adapted and excerpted from the article, see Life Insurance Advanced. For further details, see Life Insurance Additional Resources.

Below is a macro overview of the pros and cons when it comes to donating life insurance.

Advantages of donations of life insurance include:

• It is a simple way to capture a fixed contribution, by donating either an existing or new policy, or using a beneficiary designation.

• A donor may have little cash on hand, but has an unneeded policy with the specific cash value she wishes to contribute.

• The donor is able to fund the gift on an installment sale but knows the gift will be complete whenever death occurs at the exact targeted amount.

• Donor can give appreciated property to charities to tax efficiently fund the premiums.

• Aside from a direct donation, life insurance can be used with major out-right, life income or estate gifts to tax efficiently replace donations for their heirs.

Disadvantages of donating life insurance include:

• The deduction allowed from the donated policy is the lesser of the fair market value or the adjusted cost basis of the policy (assuming no capital gain element in the policy).

• Tax law always changes, and creative donations of insurance today may not have the same benefits in the future—a number of past insurance programs did not meet initial expectations.

• Many charities either do not accept insurance donations or require specific policy characteristics, like age minimums or life expectancy to maximize the donation.

• The two most powerful tax advantages of life insurance, tax free cash value build up and the tax free death benefit, are not needed by the charity.

• Assuming the donor lives to life expectancy and premiums were instead invested in the charity’s endowment and could earn greater than 5–6 percent over time, it is likely the charity would receive a larger benefit. Clearly, the converse would be true with a premature death or poor endowment investment performance.

Wrinkles in the process to consider include:

• If the donated policy has value over $5,000, a qualified appraisal is needed.

• If the policy has an outstanding loan, this will likely be deemed a personal benefit contract under the charitable reverse split dollar legislation, and no deduction is allowed in addition to triggering bargain sale rules.

• If the donor had previously agreed to pay the premiums on the policy, and stopped, there is increased risk of lapse, plus additional administrative and donor relations considerations.

With donations of life insurance to public charities, consider the questions below.

Discovery Questions

Donor Questions

1. What is the donor trying to accomplish with the gift?

2. What is the current policy cash value?

3. Does the donor intend to keep paying premiums or will the charity surrender the policy?

Advisor Questions

1. What is the policy’s current adjusted tax basis?

2. Are there any loans?

3. Is the donor aware that the policy’s deduction is the lesser of fair market value or adjusted basis?

4. Are there any surrender charges?

Charity Questions

1. Is the effort worth the expected benefits (i.e., is the juice worth the squeeze)?

2. Assuming the charity is not going to immediately surrender the policy for the cash value, does the donor understand the options the charity may use if premiums are not paid timely?

3. Is there the necessary expertise to accept and manage gifts of insurance?

4. Would the charity be better off financially investing the cash value and future premiums in the endowment?

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