Even in an era when term life insurance policies may appear to dominate, many people still hold whole life, variable life, or universal life insurance policies. In many cases, when the original need for a policy goes away (e.g., children become independent or other assets have increased to fill risk gaps), a policyholder may be left wondering what to do with the policy.
Before cashing in a policy, it’s worth knowing that life insurance can play a meaningful and often overlooked role in charitable giving. A common approach is naming a charity as the beneficiary of a life insurance policy, either in full or in part. This strategy enables a donor to make a significant future gift at a relatively modest current cost of the annual premiums, particularly when the policy is already in force. For someone who has established a donor-advised or other type of fund at the Community Foundation, this method may align well with estate planning goals because the death benefit passes directly to the fund outside of probate and may help reduce the taxable value of the estate.
Another way insurance policies are used in philanthropy is through the donation of an existing policy to the Community Foundation or other charitable organization. In this case, actual ownership of the policy is transferred to the charity, which then becomes both the owner and beneficiary. The donor may be eligible for an income tax deduction equal to the policy’s fair market value, generally based on its “interpolated terminal reserve” plus unearned premium, subject to applicable limitations. If the policy still requires premium payments, donors can continue funding those payments through additional tax-deductible contributions to the Community Foundation, effectively converting future premium dollars into charitable gifts.
If you are interested in learning more about how your life insurance policies can help you achieve your charitable goals, we encourage you to consult your insurance advisor about the details and then reach out to the team at the Community Foundation. If you don’t have an advisor, call us and we are happy to recommend. In particular, we are happy to help evaluate how life insurance gifts might fit alongside–or integrated with–other giving vehicles, such as donor-advised funds and legacy funds. We are here for you!
The team at the Community Foundation is honored to serve as a resource and sounding board as you build your charitable plans and pursue your philanthropic objectives for making a difference in the community. This article is provided for informational purposes only. It is not intended as legal, accounting, or financial planning advice. Please consult your tax or legal advisor to learn how this information might apply to your own situation.