The benefits of life insurance policies – namely the secure financial future they offer – are well-documented, but a report from Forbes reveals that more Americans are using such coverage to make charitable donations. Clients could choose to gift a policy outright or name an organization as the policy’s beneficiary. Doing so not only can help others at charities or organizations, but also the policyholder.
One major benefit of using life insurance policies to make philanthropic donations is that they help policyholders leverage the amount they can give. Modest annual premiums mature into substantial death benefits upon the donor’s death, meaning they may be able to give more than if they used cash donations.
Life insurance also lets donors give gifts that can be used today. Forbes explained that when a policyholder transfers an existing life policy to charity, it has the option to use accumulated cash value to meet funding requirements or preserve the full death benefit to meet future needs – or a combination of the two.
Donors benefit in that they can give to charities or other organizations at a discounted rate, because the income tax deduction for that donation equals the lesser of policyholders’ basis in the policy or its fair market value, Forbes reported.
“In addition, you also may be able to deduct ongoing premiums you pay for the policy on your annual federal income tax return,” the source explained. “For example, for a donor in a 35 percent tax bracket, a gift of $10,000 really costs $6,500 after factoring in the income tax charitable deduction.”
Life insurance agents and financial planners should let clients know that the simplest way to give to charity with policies is to name a certain charity as their policy beneficiary in whole or as a percentage. The client won’t qualify for an income tax deduction on premiums paid, but they will be able to retain control over the policy, including any cash value.
Another way to use life insurance to give is to donate an existing policy – for which clients assign all rights in the policy to the charity. It’s important to remind clients that should they choose this option, they are giving up all control of the policy forever.
If neither of those options appeals to clients, they could opt to use a life insurance policy in conjunction with a charitable remainder trust. This option allows clients to receive a current tax deduction for a portion of the gifted assets. The income beneficiary also will receive a series of payments based on a percentage of the trust’s assets, and with income from the CRT, the client could purchase a life insurance policy, which is usually owned by an irrevocable life insurance trust, for the benefit of his or her heirs to replace all or a portion of the donated asset’s value.
No matter the method of giving via life insurance policies, the ins and outs can be complicated, so advisors and planners who educate themselves will be much better able to help clients make the right decision.
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