Getting Started with Charitable Gifts of Life Insurance – Part 1
(What Advisors Need to Know)
By Gregory W. Baker, J.D.
Executive Vice President, Legal Services
This is Part 1 of a 3-Part series on Charitable Gifts of Life Insurance. In this post, we will review four key topics that life insurance professionals need to know about themselves, their client, and their client’s proposed charity. Part 2 will focus on policy suitability and claiming the charitable deduction and then wrap up with a Case Study. Part 3 will describe a client who gave an existing policy and a client who gave cash to a charity, which then purchased a new life insurance policy.
Key Topics for Life Insurance Professionals to Consider
Client Interest. Client surveys consistently show that clients want to leave a lasting legacy and make a difference in their community. Creating a legacy is often among the top 5 or 6 goals in estate planning client surveys. So, the real question is not whether your client is interested in making charitable gifts, but whether you are willing to help them. Otherwise, you leave an opening for your competitor to serve your clients.
Charity Interest, Capability, and Anonymity. The next topic is whether your client’s charity is both interested in a gift of life insurance and capable of managing the policy. All charities want cash gifts; few charities are equipped to handle the details of owning life insurance. These details include tracking premium payments, monitoring the policy’s performance, reviewing in-force illustrations, valuing the policy, and monitoring the issuing company’s strength. Handling these details, is one situation where national DAF Programs such as the Renaissance Charitable Foundation can help. If your client’s chosen charity is unable or unwilling to handle these details, find a DAF Program that knows how to handle life insurance policies.
A DAF Program can also help your client if she wants to make a charitable gift but doesn’t know how to pick from the more than 1,000,000 charities in the United States. A DAF Program can serve as an intermediary or holding tank for this client. Your client’s gift to the DAF Program is eligible for an income tax deduction (as described below). Before the policy matures, the DAF Program helps your client identify worthy charities and the policy’s proceeds can be earmarked or designated for the chosen charity.
Finally, if your client seeks anonymity while making charitable gifts, a national DAF Program can help avoid the gossip that often occurs when your client makes a gift through a local community foundation.
Licensing. The third topic is whether you are licensed to sell insurance in the state of both the insured and the charity. For most insurance planners, qualifying to sell insurance in another state is a simple procedure.
Insurable Interest. The fourth topic is whether the “insurable interest” laws of the applicable state permit the gift. While most states permit a charity to own life insurance on its donors, there are some occasional nuances. The general rule on insurable interest is to apply the law of the state where the policy is purchased. However, if there are any questions about a particular state’s rules or the application of insurable interest laws, the advanced underwriting department at your insurance provider can be your best ally in sorting out this issue.
In Part 2 of our 3-Part series on Charitable Gifts of Life Insurance, we will look at policy features that make a policy suitable for a charitable gift as well as steps your clients need to take to claim their charitable deduction. Part 3 will describe specific gifting techniques you can use with your clients.