According to one LIMRA study, more than 1 in 4 Americans who own life insurance policies say they purchased the policy with the intention of donating it to a charitable cause such as a non-profit or a college or university endowment fund. This statistic begs a few questions:
- How does donating a life insurance policy work?
- What makes this method of giving a favorable choice for policyowners looking for ways to donate?
- What should organizations receiving gifted life insurance policies know about this type of donation?
This educational guide answers these questions for policyowners considering donating a life insurance policy and for those charitable organizations receiving policies as donations.
Why might a policyowner consider donating their life insurance policy?
There are a few reasons why a policyowner might consider donating a life insurance policy rather than writing a check to their charitable cause of choice. Perhaps the most obvious is the unique tax benefits it provides. Not only does the owner receive a charitable contribution tax deduction (in most cases) when donating a policy, but the policy is also no longer counted toward their estate for estate tax purposes.
Beyond the favorable tax treatment, donating a life insurance policy is also a great way to get rid of an unwanted policy an owner no longer needs. So much can change between the time an owner purchases coverage and when they expect to need it. It’s critical owners are educated on the options they have besides simply surrendering the policy back to the insurance company or letting it lapse.
Lastly, for owners who wish to leave a legacy for a cause they believe in, donating a life insurance policy is an excellent way to boost their giving. Because the death benefit of a life insurance policy greatly exceeds the premium paid into it, the donor’s generosity is multiplied. Though the organization or foundation won’t receive the gift immediately, they do end up with a larger donation in the long run.
How can a policyowner donate their policy to a charitable organization?
If an owner decides to donate a life insurance policy, they have at least four different options: name the charitable cause as the beneficiary of a new or existing policy, transfer ownership of the policy, donate gift dividends from their policy, or add charitable giving riders on the policy. Each method of donating has unique advantages and disadvantages, so it’s important the owner understands the implications before committing as some of these decisions are irrevocable.
1) Designating a charitable organization, non-profit, or academic institution as the beneficiary
2) Transferring ownership from the policyowner to the charitable organization, non-profit, or academic institution
3) Giving earned dividends from a policy
This method only applies to permanent policies that explicitly earn dividends from the insurance company they’re written through each year.
4) Including charitable giving riders on a policy
What should an organization know about receiving a life insurance policy as a donation?
Like with anything else, it’s important to assess both the upside and the downside before proceeding. Life insurance can be complex, and not all insurance companies operate the same. A little education goes a long way.
First, it’s important to clarify the method by which the donor will give their policy to you. Then, assess the pros and cons as listed in the previous section. For example, if the option chosen requires that you assume responsibility for premium payments, is that something your organization can handle?
Once you decide to accept the gifted life insurance policy, it’s important to keep track of that policy for the coverage period. Unless it’s a permanent policy that you choose to surrender for immediate value, you’ll want to make sure the policy premium payments stay current – whether your organization covers the cost or not – and you’ll also want to make sure to track up-to-date policy values to make sure no material changes occur with the coverage.
If any of this sounds daunting to you, you should know there are plenty of people and technologies who can help ease the burden of monitoring a gifted policy. Whether you decide to work with an advisor who will manage your gifted policies for you, or you leverage a system like Proformex to securely store and manage your gifted policies, you don’t have to do it alone.
Conclusion
Donating life insurance policies will continue to be a trend that grows more popular over time due to the unique tax benefits this method of giving offers both donors and recipients. It’s important policyowners are empowered with information about this option so they can take advantage while supporting a cause or organization meaningful to them.
Charities, non-profits, or academic institutions that receive these gifted policies need to know how to manage those policies over time and should also know that managing those gifts doesn’t have to be overly complex and difficult. Industry experts – whether individual financial professionals or technologies built by industry innovators – are more than willing to help ensure you’re getting the value you need from those gifted policies.
To learn more about how charitable foundations, non-profits, and academic institutions with endowment funds are using Proformex to manage their gifted life insurance policies, visit our website.
Disclaimer: This article is intended for educational purposes only. Neither Proformex nor any of its representatives offer tax or financial advice. You should always consult an estate or tax attorney for specific advice for your unique circumstances.
About Mike Pepe
Mike Pepe, the visionary founder and President of Proformex, has transformed his two decades of life insurance expertise into a pioneering SaaS platform dedicated to enhancing post-sale service for life insurance policies. Starting his career at Mass Mutual and later co-founding River Financial Group, Mike honed his focus on holistic financial planning, eventually leading to the creation of The TOLI Group to address the crucial need for insurance consulting and ongoing policy management. With a personal commitment to innovation, Mike developed the foundational software that evolved into Proformex.