Life insurance is an important building block in a family’s financial plan at various life stages — and can eventually provide an easy way to make a generous charitable gift.
For young families, insurance provides a ready source of funds for living expenses and children’s education in the event that one parent dies. Also, the cash values that build through premium payments on whole-life insurance can be seen as a type of forced savings, and may be available for low-cost withdrawal for investment and other family needs. Of course, life insurance provides funds needed at death for payment of funeral expenses, debts, estate administration expenses and taxes. For these costs especially, life insurance is especially important for avoiding having to sell other assets, such as a family business or residence, at significantly reduced “forced sale” prices, or investments when markets are down.
At some point, when your family is grown, your children have been educated, and your other investments are in place, your family’s need for large amounts of insurance might not be so great. This might be the time when you can use insurance policies you took out years ago as a young family as the means for making substantial gifts to the Church through your parish, the Archdiocese of Detroit Endowment Foundation, Sacred Heart Major Seminary, Catholic Charities, or another archdiocesan institution.
A new insurance policy might also be an excellent vehicle for a charitable gift because the benefit to the Church most likely will be significantly greater than the premium cost.
You make a gift of insurance by assigning all of your ownership rights in the policy to the Church. Doing so will give the Church the right to change beneficiaries, to borrow from the policy or to surrender the policy for its cash value. You are entitled to a charitable contribution income tax deduction for the lesser of the policy’s replacement value or the net premium cost you have invested in the policy.
Take John, for example. He is 62 years old and in the 25 percent tax bracket. He owns a policy that has a death benefit of $75,000 for which he has paid $23,000 in premiums over the years. The policy has a replacement value of $36,700. John assigns the policy to the Archdiocese of Detroit Endowment Foundation. The figures below show the results:
- Net premiums: $23,000
- Policy value: $36,700
- Income tax benefit (25 percent times the lesser of 1 or 2 if John itemizes deductions on his tax return): $5,750
- Potential value removed from John’s estate: $75,000
John will have additional charitable gift income tax deductions for any premiums he pays on the policy after he assigns it to the Endowment Foundation. Moreover, any future growth in the policy’s death benefit is removed from John’s estate. The foundation, as the new owner of the policy, may surrender the policy for its cash value and exercise all other rights of ownership. If the foundation continues to hold the policy, it will collect the policy proceeds at John’s death.
As an alternative, John may want to continue to own the policy during his lifetime, but leave the policy proceeds to the Endowment Foundation. In that case, John names the foundation as beneficiary of the policy. He would not be entitled to any income tax deduction, either for changing the beneficiary or for future premium payments. However, at his death, if he has a taxable estate, his estate will be entitled to a charitable gift estate tax deduction for the policy proceeds paid to the foundation.
As this example illustrates, the net premium cost of life insurance is significantly less than the death benefit paid to the Church, making insurance a very cost-effective way to make a generous gift to the Church as part of your overall estate plan.
Whichever route you choose to make a charitable gift of life insurance, your insurance advisor can provide forms for the policy assignment or change of beneficiary.
A word of caution about charitable gifts of life insurance: In recent years, complex life insurance products have been introduced, ostensibly with a benefit to participating charities. The perceived abuse of the legitimate purposes of life insurance has attracted the attention of the Internal Revenue Service and Congress, hardly the target audience for these products.
This article is for your general information and is not intended as legal, tax, or financial advice. In planning for a charitable gift of life insurance you should consult with a reputable insurance advisor, as well as legal, tax or financial professionals. For further information on the Archdiocese of Detroit Endowment Foundation and planned charitable giving techniques, call Tom Scholler in the Department of Development at (313) 596-7408, or e-mail: [email protected].
