In big and small ways, the people of the communities served by GenWealth Financial Advisors are always looking out for others. And at our firm, we are constantly on the alert for ways to “pay it forward” by participating in things like raising funds for the Open Arms Shelter and giving to any number of worthy causes through the years. We also see those traits in the next generation of the GenWealth family. You may be asking yourself: “How can I make a big impact for others?” One way would be to utilize a financial product to amplify your generosity. If you are a regular donor to charity, life insurance could help you to make a much larger gift to your chosen cause. Instead of making periodic cash contributions to a charity, you could use the same amount to pay the premium on a life insurance policy to benefit the charity. Upon your death, the charity would receive the full face value of your policy-which would likely amount to considerably more than you could afford to donate during your lifetime.
In Addition to enhancing charitable gifts, life insurance offers potential income, estate and gift tax benefits to donors as well. The actual benefits you realize would depend on the type of life insurance used and how the donation is structured. Term life insurance policies are the least expensive to purchase. Term insurance has some drawbacks, such as increasing premiums after 20 or 30 years; however, it gives you the largest death benefit for the smallest amount of premium. Whole life insurance policies are generally more attractive for charitable-giving purposes because they typically have level premiums for the life of the contract and generally do not expire if you’ve made all of your premium obligations. However, premiums for whole life are substantially higher than term premiums. In addition, a permanent policy has a cash value component, which can increase the range of gifting strategies.
There are two basic ways of using life insurance to make charitable gifts. One is to donate an existing life insurance policy. To do so, you must transfer ownership of the policy to the charity, giving up all control of the policy. Since the transfer is irrevocable, you obtain the full tax advantages of charitable giving. You may be able to take an income tax deduction equal to your basis or the policy’s fair market value, as well as a charitable deduction for the premiums you pay. The policy will not be included in your gross estate unless you die within three years of the transfer (in which case, your estate would receive an offsetting charitable deduction).
The other way to use life insurance for charitable giving is to donate a new policy. With this strategy, you purchase and pay the premiums but immediately assign ownership of the policy to the charity. In this case, you would be entitled to take a charitable deduction for the premiums.
Alternatively, you mat want to consider naming a charity as beneficiary. While this approach is simple and would still give you access to any cash value of the policy during your lifetime, its tax advantages are limited because you retain control over the policy until you die. Upon your death, the proceeds would be included in your gross estate, although the full amount of the proceeds payable to the charity would be deducted from your estate.
Finally, if complexity is not a concern and you are planning a substantial gift, you may want to Consider using life insurance to fund a charitable remainder trust. To do this, you would want to work with an attorney to create a charitable remainder trust and then purchase life insurance to fund the trust.
During your lifetime, the trust would provide you with the specified amount of income. Upon your death, the principal of the trust would pass to the designated charity. In conjunction with the charitable remainder trust, you could also purchase another life insurance policy to benefit non-charitable beneficiaries, such as your spouse and children.
Because state and federal tax laws are complex, it is best to discuss your situation with qualified tax and insurance professionals before deciding on the structure of a life-insutance-based giving plan.