The primary purpose of life insurance is to provide financial resources for those that depend on you when you die. However, you can lessen the complexity of charitable giving through wealth transfer by using life insurance as a gifting strategy. Often, the strategies you use to transfer wealth, which organizations you want to donate to, and the length of time you want your assets to last is simplified by using life insurance.
While you can use term life insurance as part of your wealth transfer, a term policy is only in force for a specific term and may not provide a death benefit if the policy ends. A more suitable option for charitable giving is a permanent life insurance policy.
Permanent life insurance policies do not expire and cover the life of the insured providing that the premiums are paid. The two types of permanent life insurance are whole life and universal life, and generally combine a death benefit with a savings portion:
- Whole life insurance offers coverage for the insured's entire lifetime, and its savings can grow at a guaranteed rate.
- Universal life insurance also offers a death benefit and savings but has different types of premium structures and earnings based on a market's performance.
Here are the various ways to gift permanent life insurance as part of your wealth transfer strategy to benefit your favorite charitable organizations:
Name the Organization as the Beneficiary
This method is the easiest way to use life insurance to give to charity. However, naming a revocable beneficiary is one way the donor can change the beneficiary. Naming a revocable beneficiary enables the donor to remain in control of the insurance policy if their wealth transfer plan changes. Also, naming a charity upon death keeps the charitable gifting transaction private.
Gift the Policy Dividends
The donor can gift the policy dividends to charity, keeping the death benefit for other beneficiaries or another charity. The donor can take the policy's dividends in cash and donate cash with this option. With this method, the dividend donation is tax-deductible.
Donate the life insurance policy (policy donation). The donor continues to make all premium payments on a policy they donate to charity. There is no limit on the size of the policy donation, and the policy pays in full upon the donor’s death. Gifting through a policy donation can help reduce the donor’s estate taxes and provide a much more significant benefit to the charity, which has no tax consequence from the gift.
Life insurance can provide a donation more extensive than the premiums paid, making life insurance a suitable option for charitable giving. The benefits of giving through life insurance include:
- The policy value continues to grow over time until the donor dies.
- Gifting life insurance provides a much larger donation than if given in cash
- The donor can make smaller payments through monthly premium payments.
If you have questions on how life insurance can be part of your charitable giving plan, your financial professional can help.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
This material contains only general descriptions and is not a solicitation to sell any insurance product or security, nor is it intended as any financial or tax advice. For information about specific insurance needs or situations, contact your insurance agent. This article is intended to assist in educating you about insurance generally and not to provide personal service. They may not take into account your personal characteristics such as budget, assets, risk tolerance, family situation or activities which may affect the type of insurance that would be right for you. In addition, state insurance laws and insurance underwriting rules may affect available coverage and its costs. Guarantees are based on the claims paying ability of the issuing company. If you need more information or would like personal advice you should consult an insurance professional. You may also visit your state’s insurance department for more information.
The payment of dividends is not guaranteed. Companies may reduce or eliminate the payment of dividends at any given time.
All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
This article was prepared by Fresh Finance.
LPL Tracking # 1-05304549