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Benefitting from Your Life Insurance While You’re Alive
Published Date : January 30, 2017
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.
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Information provided in written articles are for informational purposes only and should not be considered investment advice. There is a risk of loss from investments in securities, including the risk of loss of principal. The information contained herein reflects Sand Hill Global Advisors' (“SHGA”) views as of the date of publication. Such views are subject to change at any time without notice due to changes in market or economic conditions and may not necessarily come to pass. SHGA does not provide tax or legal advice. To the extent that any material herein concerns tax or legal matters, such information is not intended to be solely relied upon nor used for the purpose of making tax and/or legal decisions without first seeking independent advice from a tax and/or legal professional. SHGA has obtained the information provided herein from various third party sources believed to be reliable but such information is not guaranteed. Certain links in this site connect to other websites maintained by third parties over whom SHGA has no control. SHGA makes no representations as to the accuracy or any other aspect of information contained in other Web Sites. Any forward looking statements or forecasts are based on assumptions and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. SHGA is not responsible for the consequences of any decisions or actions taken as a result of information provided in this presentation and does not warrant or guarantee the accuracy or completeness of this information. 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.
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All video presentations discuss certain investment products and/or securities and are being provided for informational purposes only, and should not be considered, and is not, investment, financial planning, tax or legal advice; nor is it a recommendation to buy or sell any securities. Investing in securities involves varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular client’s financial situation or risk tolerance. Past performance is not a guarantee of future returns. Individual performance results will vary. The opinions expressed in the video reflect Sand Hill Global Advisor’s (“SHGA”) or Brenda Vingiello’s (as applicable) views as of the date of the video. Such views are subject to change at any point without notice. Any comments, opinions, or recommendations made by any host or other guest not affiliated with SHGA in this video do not necessarily reflect the views of SHGA, and non-SHGA persons appearing in this video do not fall under the supervisory purview of SHGA. You should not treat any opinion expressed by SHGA or Ms. Vingiello as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of general opinion. Nothing presented herein is or is intended to constitute investment advice, and no investment decision should be made based solely on any information provided on this video. There is a risk of loss from an investment in securities, including the risk of loss of principal. Neither SHGA nor Ms. Vingiello guarantees any specific outcome or profit. Any forward-looking statements or forecasts contained in the video are based on assumptions and actual results may vary from any such statements or forecasts. SHGA or one of its employees may have a position in the securities discussed and may purchase or sell such securities from time to time. Some of the information in this video has been obtained from third party sources. While SHGA believes such third-party information is reliable, SHGA does not guarantee its accuracy, timeliness or completeness. SHGA encourages you to consult with a professional financial advisor prior to making any investment decision.
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