Richard K Newman
Our clients buy life insurance because they care! Parents care about the financial welfare of their family so they buy life insurance. Business owners purchase life insurance to protect themselves, their business partners, and their families. Those who have created significant wealth buy life insurance to protect against estate taxation.
Many of our clients have a passion for helping others. It’s part of their DNA and they realize that after their death, their giving stops. They use life insurance to further the causes that will miss them after their passing. Purchasing life insurance for charity is a gift from the heart.
I know this from my personal story after losing my father as a 15-year-old. No event shaped my life the way his loss did mine. It’s the reason for my decades-long involvement with Comfort Zone Camp in Richmond, Virginia. Comfort Zone’s support for children grieving the death of a parent or main caregiver is meaningful to me. I feel their pain and I have lived the long-term effects of avoiding the issues at a younger age.
Your clients may be in a similar situation based on something that’s happened in their lives. For any number of reasons, they may feel passionate about a favorite organization or cause. It’s our role as professional advisors to initiate this conversation and find out why they care so much.
Why do people give to charity?
High-net-worth individuals may not approach their financial planner, lawyer, or accountant about giving to a charity. They may, however, be sending signals about what they care about and why they care. It’s the responsibility of any trusted advisor to be perceptive so they can share appropriate opportunities and provide guidance.
The conversation typically begins with questions about the client’s current charitable involvement, what motivates their giving, and if they want it to continue after they pass. It requires tapping into their emotions and exploring why they want to give. Only then is it time to talk about how they can give.
Philanthropically motivated individuals want to make a difference. They are typically driven by compassion and empathy for a specific cause and want to use their wealth to make an impact. Life insurance can be a vehicle to help them to fund and leverage their charitable giving and achieve this goal.
How life insurance can be used for charitable giving
Using life insurance for charitable giving may begin with an audit of the client’s existing policies. After an audit, it may be found that our client can secure additional coverage for the same cost. If the client is philanthropically motivated, the additional coverage can be donated without affecting the legacy to the family or increasing costs during life.
With a clear and complete understanding of the client’s charitable interests and their ability to fund them with life insurance, a Chartered Advisor in Philanthropy can move on to the advantages and disadvantages of different strategies. Although this list is by no means exhaustive, here are some methods to consider:
- Name the charity as a beneficiary of the policy. This can be an existing policy or one that is purchased specifically for this purpose. In either case, this is a great way to make a smaller donation appear much more significant. There are many variations to consider, but if the client wants to make it a true legacy gift, ownership must be in the name of the charity. Although the client will no longer have control of the policy, this ownership structure may create significant tax benefits. If the client buys a new policy or adds to an old policy, the premiums are tax deductible because the policy is owned by the charity and you are funding the charity to pay the premium.
- Donate a paid-up life insurance policy. In this case, the owner of the policy would change the owner and beneficiary to the charity. Keep in mind, however, that paid-up policies are rare and often mistaken for vanished policies, a situation in which a premium may reappear in the future based on how the policy was funded prior to donation. Again, starting with an internal audit of the policies is so important and can help avoid this issue.
- Buy a policy to benefit the donor’s heirs as a replacement for what’s been donated to charity. This approach allows the donor to make a significant gift to charity without reducing what their heirs will receive. Any tax savings resulting from a gift of cash or property can help offset the cost of the insurance.
- Establish a Charitable Remainder Trust. If the client has a significant gain in an investment asset, they can place the asset into a charitable remainder trust before selling it. The trust is irrevocable and the client will receive a charitable deduction for a portion of the asset value. During their lifetime, income is paid to the beneficiary of the trust. At the end of the trust (normally the end of the trust creator’s life), the trust will pay out to a charity and not to the family.
The upfront income tax deduction combined with the additional income created by the strategy can be used to purchase a life insurance policy for the donor’s family. This strategy allows the client to create a significant legacy for the charity of their choice while also preserving their family’s inheritance.
Before selecting a strategy, the professional advisor must first get to know their client and what’s important to them. Talk to them about planned charitable giving to make a more significant impact and leave a legacy. At the same time, be sure to establish a relationship with your client’s offspring to make sure that they too, are involved in the process.
Although we don’t believe that charitable giving should take place solely for the purpose of creating tax savings, the benefits that typically occur for both the donor while alive and the donee organization at death, are undeniable. Above all, people give based on their emotions. In my case, Comfort Zone Camp is a very cathartic and healing environment, not only for the kids it serves but also for me. My 20-year relationship with the organization is important because it demonstrates that the charity has an insurable interest in me.
The process of advising any client about charitable giving begins with a greater understanding of what motivates them. Only then can you offer the guidance they need to leave a lasting impact on the people and organizations they care about most.
About the Author
Richard K Newman
Richard is a well-known life insurance expert who works with CPAs, attorneys, Registered Investment Advisors and nonprofits. For more than 35 years, he has guided clients with their estate planning, wealth transfer and tax-related matters.