10 Best Ways to Use Life Insurance for Charitable Giving

In this scenario, the donor is requesting a life insurance policy that will be paid up in five years.

The endowment is the beneficiary. The donor checks the charity for $6,500 each year for five years.

The society matches the checks for $6,500, which means the endowment receives a total of $13,000 each year.

The endowment uses $6,500 to pay premiums for a life insurance policy. The charity then owns the life insurance policy.

Another $5,000 stays with the endowment, and the endowment spends $1,500 each year to provide scholarships.

After five years, the endowment is complete and the life insurance contract will be released.

When the donor succeeds, the endowment will become a super endowment.

9. Offer an initial cash gift and a planned gift of life insurance, without taking money out of the donor’s pocket.

It’s basically a four-step plan:

Step 1: Use land or other assets as loan collateral.

2nd step: The lender grants a loan.

Step 3: The loan provides money to the charity, to fund the donor’s wishes and create an Irrevocable Life Insurance Trust, or ILIT, which will purchase a life insurance policy.

Step 4: The first stage guarantee is released when the value of the cash value in the ILIT is equal to the value of the guarantee.

ILIT transmits funds to the charity and to the heirs.

This is sophisticated premium financing. To implement this type of arrangement, you and your client must collaborate with a highly qualified ILIT expert.

10. Donate a policy to a charity that manages a portfolio of life insurance policies and uses the proceeds from the policy to provide regular cash flow to other designated charities.

It’s the newest, easiest and easiest way to donate a life insurance policy. All financial advisors should discuss this approach with their clients.

The donor donates the policy to a specific 501(c)(3) non-profit charity (“Charity A”) established to benefit other charities.

Donors choose the ultimate charity they wish to support, once the policy has been accepted by Charity A.

Charity A pays for all costs associated with keeping the policy in force until maturity, eliminating any need for the donor or ultimate charity to pay the premiums.

Charity A also administers policies and manages portfolios, relieving the ultimate charity or donor from having administrative capabilities.

After the donor completes donating the policy to Charity A, the donor receives a charitable income tax deduction.

Charity A places the donor’s policy in a trust with enough other policies to achieve actuarial credibility. As the policies mature, the trust distributes money to any charities nominated by the donors, with distributions based on the difference between premium costs and the amount of policy benefits received .

In other words: the ultimate donor charities do not have to wait for their donors to die to receive distributions.

The donors’ ultimate charities receive distributions from the trust for the life of the trust, whether their particular donors are dead or alive.

This is a paradigm shift, allowing some donors to see the good works they have funded with life insurance while they are still alive.

Now that the donor no longer pays premiums for the given policy, the donor’s cash flow is improved.

The reasons

As you can see, life insurance offers great flexibility for clients who want to include charitable giving in their long-term financial and estate planning:

• Proceeds from the life insurance policy are paid in cash. Life insurance gifts are generally not subject to possible probate fee reduction. Unless the proceeds of death are payable to the estate, late settlements generally do not occur.

• A gift of life insurance is practical. Changing the owner and/or beneficiary of a life insurance policy can be easier and more cost-effective than creating a trust, writing or changing a will, or arranging other forms of giving.

• A gift of life insurance is private. A life insurance policy is not in the public domain; thus, total confidentiality of donations can be ensured.

• A gift of life insurance is economical. In some circumstances, the size of a person’s donation may actually be greater than the original cost.

Charitable giving and life insurance have gone hand in hand for many years.

If you haven’t been active in charity planning, you should consider hiring charity planning specialists to help clients structure life insurance gifts that can support their favorite causes.


David B. Simon is a lawyer, co-founder and president of the Ensuring a Better World Fund in Chicago. The fund helps donors use unwanted life insurance policies to support charitable causes.

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