LIFE INSURANCE
There are several issues to consider in the use of life insurance.
The first is the fact that you can designate a charity as the beneficiary
of your life insurance policy. That obviously provides quite a bit of "leverage"
over just providing the charity a cash gift. Within that context, you need
to know the pros and cons of such gift.
1. If you are buying a new life policy, what type are you going to buy? Term
will last just for a set period of time. If you died within that time frame,
the charity would benefit. However, if the term expired, then they receive
nothing. One must address the cost as well. Once the original term has expired,
and further coverage is contemplated, the premiums may end up being exorbitant.
2. If, on the other hand, you purchased the standard whole or universal life plan, it would only "work" if you intended to use the cash value buildup as a loan for yourself later on. Further, that you intended to only give the charity a "net" gift of insurance since the loan would be subtracted from the policy face value. For example, if you had a $300,000 policy that had a $100,000 loan, the charity would receive the net amount of $200,000 upon your death.
3. If the entire policy was always intended to be paid to the charity- and
no loan was ever contemplated- then the standard whole or universal life
policy is not a valid policy for charity purposes.
That's because the traditional polices are designed
to buildup extra cash value as a loan later on. As such, the policies cost
more- usually a lot more- than those few policies designed to just provide
insurance. Or, in other words, buying the cheap policies will provide
a LOT more coverage- up to a third more- for the charity.
4. In the above examples, I assumed the policies were retained by the individual.
Continual premium payments are made by the individual and are not deductible.
If an existing policy is gifted to a charity, recognize that a gift is given
but it is not the face value of the policy. It
is, essentially, the cash value of the policy. You could get a current deduction
that way, but you may still need to make payments to the charity each year
to pay the premiums. These would also normally be a gift.
5. Wealth Replacement Trust and life insurance. This is dealt with in an
illustrative format on another page but is simply a method of replacing assets
given to a charity with life insurance so that the beneficiaries are "protected".
It is not mandatory that the assets be replaced, but some people will not
give a gift if it amounts to disinheriting their children (or others).
Nonetheless, almost all are buying the wrong type of insurance. See #3 above.
You don't want cash value in these policies or those designed to pay estate
taxes. Illogical and expensive.
As with all my commentary, and certainly with life insurance, be sure to check with appropriate experts BEFORE proceeding with any life insurance activity.
"Life Insurance as a Charitable Planning Tool: Part II" part two from the April 2002 issue of Estate Planning Journal wherein the authors suggest additional planning strategies, examine the effect of state law, and explain how to handle troublesome transactions.