Charitable Gifts of Life Insurance – What’s Deductible?

May 1, 2009 by  
Filed under Featured

warmsmile150x131Gifts of life insurance to charity are popular. However, the transaction is a bit more complicated than it might seem at first blush. 

There are caveats. Do some things wrong and adverse tax consequences and/or penalties could apply.

In this post, I will examine what is deductible in three different life insurance policy gift scenarios.

Meet Jane

Jane was widowed at an early age. Her husband left her with two children. He also left her financially secure by virtue of having bought a sizable life insurance policy after their children were born.

After her husband’s death, Jane followed his planning and bought several life insurance policies, naming her children as beneficiaries.

Fast forward 20 years. Her two children are now grown, out of college and have successful high-income careers of their own.

Consequently, Jane has concluded that the life insurance policies have served their purpose and are no longer needed. She wants to give the policies to the church where she and her husband attended in his memory.

First Steps

The first thing Jane needs to do is to make a copy of her policies and obtain an “in-force ledger statement” (IFL) on each policy from the respective insurance companies. The IFL projects the values of a policy from today forward, using the current dividend scale/interest rate.

Second, she needs to meet with the church’s planned giving resource professional and give him/her this information. Not all churches accept gifts of life insurance. Those that do generally have a Gift Acceptance Policy. The type, status and characteristics of her policies will be compared to the criteria set forth with regard to life insurance gifts.

Jane has three types of policies. Let’s take a look at how each is valued for charitable tax deduction purposes and see what her tax deduction and best option is for each policy.

Policy #1: Paid up

This policy was purchased 18 years ago from a highly regarded mutual company. Jane elected to pay a level premium and have the dividends buy more insurance each year (called “paid up additions”). Two years ago, the death benefit had grown to one and a half times the original face amount.

Jane met with her agent and she helped her with the paperwork to discontinue her premium payments and take a paid up policy.

The resulting death benefit was less than the total death benefit the policy had grown to over the 18 years, but still a little greater than the original face amount. The death benefit, after electing the paid up policy, would continue to pay dividends, which buy more insurance each year.

Her charitable tax deduction for the gift of this paid up policy is the lesser of her cost basis, essentially the total premiums she has paid in this case, or the policy’s “replacement value.”
 
Replacement value is defined as the premium she would have to pay at her age for a single premium policy with the same death benefit. This premium can be easily obtained from the insurance company.

Policy #2: On-going Premiums

Jane is still paying premiums on this policy. The charitable tax deduction is the lesser of her cost basis or the “interpolated terminal reserve” plus any unearned premiums.

The interpolated terminal reserve is a value close to the cash value, and is the value required by the IRS. This number is also easily obtained from the insurance company. It is calculated by actuaries, incredibly smart mathematicians.

Policy #3: Group Life Insurance

Jane is the head of the HR department for a large local company. The company provides a $50,000 group life insurance plan for all employees. In addition, there is a supplemental plan for department heads and above equal to three times salary. As such, Jane has $350,000 of group term life insurance.

There are no income tax ramifications for group term life policies up to $50,000. However, for amounts greater than $50,000 the government requires including in taxable income their view (the Table I cost) of the value of the excess amount.

On the advice of her astute life insurance professional, Jane elects to change the beneficiary on her group life policy and name the church as the beneficiary of the death benefit in excess of $50,000.

This move erases her requirement to include the Table I cost in her income each year. Therefore, she has made a $300,000 charitable gift possible for which she is paying nothing. Very cool.

Furthermore, she can change the beneficiary; the election is revocable. Nor can the government recapture the tax she would have been paying on the Table I costs during the time the church was the beneficiary. Of course, group term life is only in effect during a person’s employment.

Summary

There are more factors to assess when contemplating a gift of life insurance to a church or charity. However, this should get you thinking. Are you in a situation where a life insurance gift would be beneficial to you and your church? If so, get the ball rolling by setting up a meeting with your insurance agent and the church’s legal advisor.

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  • Brooke Fraser

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