Benefitting from Your Life Insurance While You’re Alive

There’s a time for buying life insurance and for many people it is when their first child is born.  Along the way, you may have increased your insurance coverage as more children and a larger mortgage became a part of life. If those babies are now adults, your mortgage is paid off and your investment portfolio comfortably covers your retirement needs and estate planning goals, you may still have the insurance policies but your heirs no longer have the same need for them. What can you do?  You might consider donating them to charity.

First, it is important to determine what type of insurance policy you have available for donation – term, whole, or universal life. Paid-up whole or universal life are the most likely to be accepted by your favorite charity, but you should check with them before going any further.  You may also consider opening a Donor Advised Fund (DAF) if you don’t already have one and using the insurance policy as the funding mechanism. DAF’s may be better equipped to handle donations of complex assets like life insurance and they allow for grant making to qualified charities over time with no annual requirement for giving.

Making a gift using your life insurance policy can be done in a couple of ways. The easiest thing to do is simply change your beneficiary designation and name the charity. In this scenario, you would retain ownership of the insurance policy — and therefore the flexibility to make changes in the future should your circumstances or charitable goals change. Given that the face value or death benefit of your insurance policy is likely significantly higher than the cash value; this method serves to amplify what the charity ultimately receives with possibly no more cash out of pocket for the donor.  The charity simply needs to wait (hopefully many years) until your passing to receive the gift. The downside of this method is the fact that there is no current income tax deduction available for the donor.  There will, however, be an estate tax exemption for the full amount of the gift when the charity ultimately receives the proceeds.

The other option for giving involves irrevocably changing the ownership and beneficiary of your insurance policy to the charity. The charity will then make the determination about whether to keep the policy until your passing or to liquidate it, though most are likely to liquidate it immediately. While this method offers you the benefit of an immediate tax-deduction, be aware that it is limited to the lesser of the fair market value (net cash value?) of the policy or your basis. Remember that your basis in a life insurance policy is the value of all the premiums you’ve paid less any dividends or cash withdrawn from the policy. Your basis may be significantly different than the cash value of the policy, so check with your insurance agent or review your annual policy statement to make sure you understand the numbers.

Finally, if you’re considering making a gift with life insurance be sure to discuss your plans with your CPA.  A qualified appraisal will be required to document any gift over $5,000.  This is easily obtained with the proper documentation, but does add one more step to the donation process which can take a few months from start-to-finish.

Given the potential threat to charitable deductions under a Trump tax plan, 2017 may be the year to accelerate your giving.  A donation to a DAF of a no longer needed life insurance policy could provide a double benefit – an income tax-deduction now and seed money to provide for years of charitable giving.

This information has been developed internally and/or obtained from sources that Sand Hill Global Advisors, LLC (“SHGA”), believes to be reliable; however, SHGA does not guarantee the accuracy, adequacy or completeness of such information nor do we guarantee the appropriateness of any investment approach or security referred to for any particular investor. This material is provided for informational purposes only and is not advice or a recommendation for the purchase or sale of any security. This information reflects subjective judgments and assumptions, and unexpected events may occur. Therefore, there can be no assurance that developments will transpire as forecasted. This material reflects the opinion of SHGA on the date made and is subject to change at any time without notice. SHGA has no obligation to update this material. We do not suggest that any strategy described herein is applicable to every client of or portfolio managed by SHGA. In preparing this material, SHGA has not taken into account the investment objectives, financial situation or particular needs of any particular person. Before making an investment decision, you should consider, with or without the assistance of a professional advisor, whether the information provided in this material is appropriate in light of your particular investment needs, objectives and financial circumstances. Transactions in securities give rise to substantial risk and are not suitable for all investors. No part of this material may be (i) copied, photocopied, or duplicated in any form, by any means, or (ii) redistributed without the prior written consent of SHGA.