Life Insurance Legacy Gifts: Cover What You Love

Gifts of Life Insurance 

Many adults purchase whole life or term life insurance policies when they are young, their children are young, and they have significant financial liabilities. Sometimes, when people mature and their kids grow up, they no longer need the life insurance policies they purchased earlier in life. That said, they’ve invested in the policy for years and if they stop paying, the investment has no return. 

If the policy owner continues to pay the premiums and names a nonprofit organization as the beneficiary of the policy, upon the donor’s death, the policy’s death benefit can be used to support the nonprofit mission. The policy’s death benefit can be deducted from the donor’s taxable estate. 

Life insurance, like IRAs, is passed to the beneficiaries outside of probate. Life insurance benefits are typically paid within weeks to months of the policyholder’s death. 

Gifts of Whole Life Insurance Policies

Unlike term life insurance which provides coverage for a specific number of years, whole life insurance provides coverage for the entire lifetime. Living donors can donate their whole life insurance policy to a qualified nonprofit organization and deduct the cash equivalent of the surrender value (provided by the insurance company) of the policy on their income tax return. The nonprofit organization can then determine, on a case-by-case basis, whether to hold the policy until the death of the donor or sell it to a third party for value. It is important for the organization to understand whether all premiums have been "paid up" to maintain the policy for the donor's lifetime, or the new owner will need to continue paying premiums or pay premiums at some time in the future when the cash value has been exhausted.

Remember that if individuals include a charitable donation in their estate plan, the amount of the donation will be subtracted from the overall value of their estate. This reduction can decrease or even completely offset the value of the assets that are subject to estate taxes. Gifting certain assets can be more tax-efficient than others.