September 25, 2024

Increase Clients' Giving Capacity with Life Insurance

If your clients would like to increase the impact of their charitable giving without compromising their broader financial goals, life insurance may provide a solution. Here are some relatively easy ways you can incorporate life insurance into your clients’ giving plans.

Three (Relatively) Simple Ways to Incorporate Insurance Into Your Client’s Giving Plan

1. Purchase a new policy and designate your client’s selected charities as beneficiaries.

If your client is younger and relatively healthy, they may be able to purchase a large insurance policy for a relatively low annual premium. Designating their selected charities as the policy’s beneficiaries allows them to leverage this smaller annual investment into a larger eventual gift.

2. Fund gifts to loved ones with life insurance, and bequeath less tax-advantaged assets to charity.

Many clients’ estate planning goals include both charitable giving and bequests to their loved ones. When developing an estate plan that includes both charitable and non-charitable beneficiaries, remind your clients that the type of assets you leave to each group can make a difference.

Public charities typically do not pay income tax on the donations they receive. However, individuals are required to pay income tax on certain types of inherited assets. Funds received from an inherited traditional IRA or qualified retirement plan must typically be included in their taxable income, while any life insurance proceeds they receive are typically excluded.

If your client can purchase sufficient insurance to provide for their loved ones, designating them as beneficiaries of that policy may be more tax-effective than leaving other assets to them. Those other assets could then be used to support your client’s selected charities, provided those organizations are able to accept and manage those assets. (As we discussed in last month’s blog post, charities vary in their ability to accept and manage non-cash gifts.)

3. Donate an existing policy to your client’s selected charity.

If your client owns a paid-up life insurance policy (a policy that no longer requires premium payments), they could donate that policy to a charity of their choice. Depending on their tax situation, your client could receive a charitable deduction upon transfer of the policy equal to either the policy’s fair market value or the donor's adjusted cost basis (which is generally equal to the total premiums paid). 

Considerations to Discuss with Your Clients

While life insurance can be a powerful tool for charitable giving, there are some factors to consider before incorporating it into your client’s giving plan:

• Policy type: Ensure that the life insurance policy types available to your client align with their broader financial goals.
• Charity’s ability to accept the policy: Before initiating transfer of an insurance policy or other non-cash asset to a charity on your client’s behalf, contact that organization to make sure it accepts gifts of insurance policies.
• Tax implications: Make sure your clients fully understand the tax implications of their charitable gifts, and properly report any policy transfers on their tax returns.

If you or your clients have additional questions about making gifts of non-cash assets to MCF, we would be happy to help! Alison Helland, Director of Donor and Advisor Engagement, can assist you or refer you to another member of our Donor Engagement team to serve as a resource for your specific situation. You can reach Alison via e-mail at ahelland@madisongives.org or via phone at 608-446-5937.

Please note that this article has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice.