Life Insurance (Lifetime Gifts):

Questions Donors Ask

How do I arrange a gift from my life insurance?

Donors can contact their life insurance company and request a “Change of Beneficiary/Ownership” form to designate your organization as the new owner and beneficiary of their policy.

What are the tax implications of a gift of life insurance?

If donors give the policy to your organization while they are still alive, they will receive an immediate income tax deduction for the current value of the policy. If they pay any future premiums to keep the policy active, these payments are also tax deductible. If ownership of the policy is retained, benefits payable to you at death can save federal and state estate taxes depending on the size of the donors’ estate and their state of domicile. Any death benefits passing to heirs will not be subject to income or inheritance taxes but may be subject to federal and state estate taxes.

Will your organization accept ownership of a term policy?

Since all policies can provide important support for your organization, you should be prepared to accept most types of policies. Donors should keep in mind, however, that while premiums for term policies are a fraction of those required for whole-life policies, term policies never build up internal cash value. In most cases, it is far simpler for the donor to retain ownership of the term policy and name your organization as the beneficiary of the policy.

Will I receive an income tax charitable deduction for the contribution of a new policy?

Donors will be eligible to claim an income-tax charitable deduction based on the policy’s internal value. Typically, a new policy has little, if any, internal value unless the donor paid a significant initial premium. It is usually more efficient and cost-effective to make outright gifts to your organization’s endowment than to fund a gift through a new life insurance policy, which has high associated investment costs. Before donors set up a new life insurance policy for the benefit of your organization, advise them to contact you to discuss alternative options.

Is my income-tax charitable deduction amount the same as the policy’s cash-surrender value?

No. The policy’s fair market value is not the same as its cash surrender-value. For a paid-up policy, the value is its replacement cost. For a policy on which premiums are still owed, the fair market value is the “interpolated terminal reserve” value, which is slightly higher than the cash value. The life insurance company will provide the donor with the policy’s value as of the date of transfer.

Can I deduct gifts to cover premium payments in subsequent years?

Yes. Donors will make contributions to your organization to cover the premium costs and will be able to claim an income-tax charitable deduction for the amount contributed.

If I no longer wish to make gifts to cover premium payments, or if policy dividends are no longer sufficient to cover premium payments, will your organization make up the difference?

No. Although the face value of the policy is larger than the cash value within a policy, your organization will likely need to surrender any policy that goes into default for nonpayment of premiums rather than apply other donors’ funds to cover the premiums due. You will then apply the proceeds from surrendering the policy to the purposes the donor designated.

What if I have taken a loan against my policy?

Your organization cannot accept a life insurance policy against which the donors have an outstanding loan; they will need to pay off the loan before making the donation.