Legacy gift-planning through life insurance

Legacy gift-planning through life insurance

We all think about the future. Many members of the Jewish community express concern about passing their values on to their children and future generations. The Jewish Federation in the Heart of NJ has joined with the Harold Grinspoon Foundation’s Life & Legacy program to address these concerns.

One way for forward-thinking families and individuals to secure a Jewish future and their financial situation is through careful legacy planning — this is also a way to express their philanthropic interests and personal passions.

In thinking how best to plan a legacy gift, there are several approaches: designation in a will, an estate plan or retirement account, trust assignments, gifts of assets (cash, stocks, or annuities), and life insurance.

Life insurance is an important charitable gift-planning tool as it can be used to make a present gift as well as a future one, often much larger than otherwise possible. Through the payment of premiums on a life insurance policy, which can be a present deduction on one’s tax return, this type of gift becomes affordable, especially for young donors. The designation in the policy is that the gift is irrevocable and the charity is both the owner and beneficiary of the policy. This allows the donor to take a charitable tax deduction for all premiums paid. 

According to insurance consultant Keith Zimmerman, “This is a great way to take comfort knowing that your charitable legacy is in place and predetermined in your estate-planning process. Life insurance can be a powerful tool to make a large legacy donation to a charity for a relatively small annual premium.” He added that he and his wife used this procedure for an endowment to the Jewish Federation in the Heart of NJ and another to their synagogue. “Since the charities own the policies,” he said, “our premiums are income-tax deductible every year. This enabled us to give a significant endowment for a very modest sum.” 

There are various ways to accomplish making a charitable contribution of life insurance:

• A charity can be named as the beneficiary or partial beneficiary of a policy a person already owns. The insurance company will provide an easy-to-complete form. No other change needs to be made; however, since the donor remains the owner of the policy, the premiums are not tax deductible.

• The donor applies for a new insurance policy naming the charity as the owner and beneficiary. The process is the same as any other life insurance application, and the charity signs onto the application. All products work fine; term insurance, however, has a limited time frame, thus other forms of policies work better.

• Transfer a policy already owned to the charity. This saves a policy that otherwise may no longer be needed. The charity is named as owner and beneficiary. The donor receives a charitable income tax deduction for what is essentially the lesser of the cost basis or fair market value for paid-up policies. The cash value of the policy may be sufficient to maintain the policy without further premium payments. The life insurance company will provide an appraisal on the worth of this policy, and help determine what additional premiums, if any, are needed. However, gifts of insurance policies with outstanding loans can be problematic, so consult with your financial adviser before making such a gift.

Certified financial planner Mark D. Lowe explained, “Life insurance can be used effectively as a tax-free, wealth-replacement vehicle for your family while donating appreciated property or taxable IRS assets (such as heavily taxed IRA and 401(K) plans) to charity — it’s a great combination.” 

Nonprofits will work with an individual’s or family’s legal, financial, estate planning, or insurance professionals. Those interested in exploring legacy giving as part of their philanthropic and estate planning goals should speak with this type of professional. 

Certified pension consultant Elise Feldman said, “These forms of endowment give you options to accomplish your current and future goals. Life insurance is an easy method to employ and one you can explain to your family.”

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