Life insurance can be used to make charitable gifts

October 10, 2011

How to purchase a life insurance policy as a means of making a charity donation.

Q: One of my colleagues is purchasing a new life insurance policy as a means of making a charitable donation. How does this work, and what are the advantages of this strategy?

A: Life insurance offers several ways for a donor to leverage greatly his or her ultimate charitable gift to a nonprofit organization. Purchasing a new life insurance policy has become a very popular planned giving technique because the premium cost usually is low compared with the death benefit that will be paid to the charity on the donor's death.

Typically, the donor applies for a permanent life insurance policy on his or her life and names the charity as both the owner and beneficiary of the policy. Because the charity is the owner, the donor's annual gift of the premium payment is completely tax-deductible.

Additionally, a donor even could decide to pay for the policy over a specified number of years or until retirement. This strategy also increases the annual income tax-deduction and allows a guarantee that the policy will be fully "paid up" during the donor's working years.

Life insurance is an extremely valuable gift because the death benefit is paid to the charity in a lump sum unless the donor elects another settlement option. A variety of life insurance policies are available in today's marketplace. The best approach is to meet with a life insurance professional who is familiar with estate planning and charitable giving strategies, to determine which type of policy might work best in your situation.

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Answers to our readers' questions were provided by John W. Miller II, principal of Sterling Risk Advisors in Marietta, Georgia, and Lawrence B. Keller, CFP, CLU, ChFC, founder of Physician Financial Services, Woodbury, New York. Send your money management questions to medec@advanstar.com