Why Life Insurance?

LEVERAGE 

The greatest advantage of a gift of life insurance is that a donor can make a substantially larger gift to charity by using life insurance than by giving any other asset. Relatively modest annual premiums mature into a substantial death benefit at the donor’s death. This is further enhanced when a charity owns the policy because of the income tax charitable deduction the donor receives. The donor’s gift (cash to pay premiums) essentially costs less. For example, for a donor in a 32% tax bracket, a gift of $2,500 really costs $1,700 after factoring in the income tax charitable deduction, if the donor itemizes deductions. 

GIFT OF AN EXISTING POLICY 

The gift of an existing policy can be relatively “painless” to the donor in several respects. The transfer is simple; all that is required to complete the transfer is a change of ownership form. Absent a loan on the policy, the donor does not recognize income no matter how large the gain. In addition, if the donor does not intend to use the policy as a source of cash, a gift of a policy is not often perceived as a “loss” of an asset. 

BENEFIT TO CHARITY 

A charity-owned life insurance policy requires less administration by the charity than many other assets, like real estate or business interests. In addition, the charity can easily take advantage of cash values in the policy before the donor’s death by using loans or withdrawals. Both the cash value buildup and the death benefit are generally income tax-free to the charity. 

DEATH BENEFIT

The death benefit, whether from a policy owned by the charity or from a policy with the charity as beneficiary, is received by the charity without reduction for estate or income taxes and is not subject to the delays and expenses of probate. The death benefit is less likely to be contested by the donor’s beneficiaries than other assets.

Charitable Gifts of Life Insurance 

NAME CHARITY AS BENEFICIARY OF POLICY

• No income tax charitable deduction. 
• At death, the death benefit may be included in the estate for estate tax purposes; if so, the estate receives an offsetting estate tax charitable deduction. 

NAME CHARITY AS IRREVOCABLE BENEFICIARY OF POLICY 

• No income tax charitable deduction. 
• At death, the death benefit may be included in the estate for estate tax purposes; if so, the estate receives an offsetting estate tax charitable deduction. 

TRANSFER POLICY TO CHARITY 

• Income tax charitable deduction in year of gift. 
• The death benefit is not included in the insured’s estate for estate tax purposes if the gift is more than three years before death. If death occurs within three years of the gift; the death benefit may be included in the estate for estate tax purposes; if so, the estate receives an offsetting estate tax charitable deduction. 
• Change of ownership and beneficiary designation forms should be completed showing the charity as owner and beneficiary. 

TRANSFER CASH TO CHARITY TO PURCHASE A NEW POLICY 

• Income tax charitable deduction in year of gift. 
• The death benefit is not included in insured’s estate. 
• Charity must have insurable interest in the donor. 
• In states where charity has insurable interest in a donor, charity should be applicant, owner and beneficiary. 
• In states where charity lacks an insurable interest in a donor, donor should be the applicant and charity should be the owner and beneficiary. 

In short, life insurance is a great tool that provides legacy considerations for both your family and philanthropic endeavors.

This publication is not intended as legal or tax advice. This information was compiled by the advanced planning attorneys of The Northwestern Mutual Life Insurance Company. It is intended solely for the information and education of Northwestern Mutual Financial Representatives, their customers, and the legal and tax advisors of those customers. It must not be used as a basis for legal or tax advice, and is not intended to be used and cannot be used to avoid any penalties that may be imposed on a taxpayer. Northwestern Mutual and its Financial Representatives do not give legal or tax advice. Taxpayers should seek advice based on their particular circumstances from an independent tax advisor. Tax and other planning developments after the original date of publication may affect these discussions.
Article prepared by Northwestern Mutual with the cooperation of Glenn Graves, a Financial Advisor with Northwestern Mutual, the marketing name for The Northwestern Mutual Life Insurance Company (NM), Milwaukee, Wisconsin, and its subsidiaries. Glenn Graves is based in West Palm Beach, FL. To contact Glenn, please call 561-352-9322, e-mail at glenn.graves@nm.com or visit glenngraves.nm.com.