The Suit Magazine

A Financial Decision that does Wonders for Your Heart

Provided By: James J. Bufalo, CLU, ChFC and Alex Conti, Northwestern Mutual

Winston Churchill once said, “We make a living by what we get, but we make a life by what we give.”
Many of us share a dream of making an impact on the lives of others – a deep desire to “give back” to a society that has given so much. The good news is, you don’t need to be wealthy to support a cause that’s close to your heart. Life insurance can be an easy and flexible way to make a significant gift to a favorite charity – at the same time it offers practical advantages, including possible tax deductions.

There are several ways to make a charitable gift using life insurance. You can:
1.    Name a favorite charity full or partial beneficiary of a new or existing policy.
Upon your passing, all or part of the face value amount of the policy will go to the charity you name as beneficiary. Until that time, you remain in control of your policy. This means you have the flexibility to make changes to the policy at any time, including switching your choice of charitable beneficiary. You also retain access to your policy’s cash value. Although the death benefits will be included in your estate, any estate taxes will be offset by an estate tax charitable deduction.

2.    Donate an existing policy. Like many people, you may have more than one insurance policy, each purchased to satisfy a specific need.
Some of those needs may no longer exist (e.g., providing for a child’s education or paying off a home mortgage upon death). By giving one of your policies to charity, typically you may take an income tax deduction equal to the fair market value of the policy or your cost basis, whichever is less, in the year in which you make the gift. If the policy is not paid up, any future premiums paid may also be income tax deductible, and the proceeds will not be included in your estate as long as you live at least three years beyond the gift. Keep in mind, when you give a policy to charity, that charity becomes the owner of the life insurance policy. This means you give up all control of the policy forever.

3.    Gift your policy dividends.
Life insurance policy dividends received in cash can also be donated to charity – an easy, economical way to make charitable gifts.  Typically cash dividends are received tax-free up to your basis in the policy.  After you recover your basis, additional dividends received are taxable to you.  Most of the time, the cash you give to charity is deductible.

4.    Give excess coverage.
If you participate in a group term life insurance policy at work, you may be required to pay income tax on the cost of coverage over $50,000. By naming a charity as the beneficiary of the group term insurance for this excess coverage, you can not only make a significant gift to charity, you may be able to avoid this tax.

Leaving a Legacy
Finally, life insurance can be an effective wealth replacement tool as part of an estate plan. If you transfer assets to charity and are entitled to an immediate income tax deduction, you can use the tax savings from that deduction to purchase a life insurance policy to benefit your heirs.

Using life insurance to meet your philanthropic goals is an innovative way to provide meaningful, and often much greater, financial support to a favorite charity. A knowledgeable financial representative can help you determine if life insurance is appropriate for your philanthropic goals and guide you through the transfer strategies and tax consequences. Working in conjunction with your legal and/or tax advisor, he or she can offer solutions to meet your particular needs.

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