John Keith, assistant vice president of gift planning at the Indiana University Foundation, highlights the pros and cons of using life insurance as a planned-giving tool.
Giving through life insurance can be a great way to make a charitable gift. However, it is important to make sure that the life insurance product selected fits with the expectations of both the donor and the charitable organization.
If the donor already owns a policy and decides to use it to benefit a charity, the donor can name the charity as a beneficiary of the policy so that the charity will receive the gift after the donor passes away.
For the charity, it's not that different from being included in a donor's estate plan. As with bequests, it is important to maintain a relationship with the donor because the donor could change the beneficiary of the policy at any time.
Choose your policy wisely
But if a donor asks the charity to serve as both policy owner and beneficiary, things get more complicated.
On the one hand, this type of insurance gift can be more reliable for the organization, as transferring policy ownership is a permanent choice.
If the charitable organization is owner of the policy, then the premium payments made by the donor may be deducted as charitable contributions. However, the charity will also be taking on the risks and effort involved in administering the insurance policy, and so should have some say in what type of policy the donor selects.
Encourage donors to give a policy that avoids interest-rate or market-performance assumptions, where premiums might be a fixed dollar amount each year, but that premium might only be covering the policy if interest rates maintain a certain level.
If the policy does not earn as much as was projected at the time of the gift, premium payments can suddenly double or triple later in the donor's life when she may be less able to afford it on her post-retirement income.
Unless the higher premium is paid, the life insurance policy can lapse without value. The donor would have invested in the premiums for all those years with no benefit to the charity.
By contributing a more traditional "whole-life" policy that does not rely on interest rate assumptions that may not materialize, the donor and the organization can have greater confidence that the premiums will remain fixed each year for the rest of her lifetime.
Have your ducks in a row
When preparing to accept ownership of a life-insurance policy, take a careful look at your organization's gift guidelines and the policy's illustration, which projects future policy values.
Accepting ownership of an insurance policy requires a certain threshold of resources and staff. It is important to monitor at least annually the updated policy values of all policies that your organization has received as gifts.
It is possible that volunteer board members who have some expertise as attorneys or financial planners could help fulfill that role.
Preserve annual giving
You would not want a life insurance gift to affect a donor's annual giving pattern.
Let's say a donor (age 48) who usually gives $1,000 per year decides instead to give you a $100,000 life insurance policy with a $1,000 annual premium payment.
It may appear that you've just raised more money, but it's really taking away valuable current money and turning it into money you will receive later. The donor has decided to view the annual premium payments as if that represents his annual gift to your organization. In reality, the annual gift now goes to an insurance company and not your organization.
The premium may remain $1,000 per year for the rest of the donor's life but if he were an annual giving donor you would likely encourage him to increase his annual giving level in the future. Now you may have lost that opportunity because the donor has replaced his annual gift with a fixed, annual premium payment.
In the best case scenario, the life insurance gift should be a way for a donor to make a gift that supplements rather than replaces annual giving.