Investing in the Future: Make a Difference Using Life Insurance

November-December 2010

By Michael Fischer, Guest Author

Have you ever wanted to give to the Scottish Rite Foundation but felt unable? Did you know that you may potentially be able to help the Scottish Rite Foundation using life insurance? Life insurance can provide a way of leveraging a small amount of premiums to a much greater benefit. It could be a policy that you already own or one that you purchase new. Furthermore, using life insurance as a gift could possibly allow you to make a larger gift than you would otherwise have been able to make.

When used appropriately, life insurance can help you establish a legacy that will last beyond your lifetime, minimize taxes, and establish stability in your estate planning. If you’re considering using life insurance to provide a gift to the Scottish Rite Foundation or any other qualified 501(c)(3) charitable organization, here are a few strategies you might consider. Make sure to check with the organization to see that contributions made to it qualify for a tax deduction. Consult a tax advisor to ensure your gift is structured properly.

Name the charity as recipient of proceeds of policy.

One option is to designate the charity as the beneficiary of your existing policy or a new policy by completing a beneficiary designation form. You own the policy and pay the premiums. Upon your death, the charity receives some or all of the proceeds from the policy. You will keep control over the policy. You will be able to change the beneficiary in the future if desired. You receive no immediate tax deduction. Upon your death, the policy is included in your gross estate, but your estate will receive an estate tax charitable deduction for the amount going to the charity.

Name the charity as recipient of dividends.

While not all policies allow for this option, some pay dividends. These types of policies are designed to last for your lifetime. You designate the charity to receive the dividends on the cash value of your life insurance policy while living. Depending on your situation, the dividends may or not be included in current taxable income; however, you may be able to receive a tax deduction for the gift. Upon death, your heirs receive the proceeds. You will have made a gift to the charity without having taken away from your heir’s inheritance at your death depending on what you would otherwise have done with the dividends.

Donate an existing policy to the charity.

You assign all ownership and give the actual existing policy to the charity. The charity becomes owner and beneficiary. You are the insured. The gift or a portion of the gift may be tax deductible. The amount that is deductible is the lesser of the value of the policy or the basis in the policy. Future premium payments you make may also be tax deductible. The proceeds of the policy will not be included in your gross estate (unless you pass away within 3 years of the policy donation) and, if it is included in your estate, you will receive an offsetting charitable estate tax deduction. You do lose all control over the policy and cash value during your lifetime.

Donate a new policy to the charity.

You purchase a new life insurance policy in the charity’s name. You will never own the policy. You are the insured and the charity is owner and beneficiary. You will continue to make the premium payments as needed to maintain the policy. You will not have control over the policy or cash value. You may get a tax deduction for the premiums paid. Since you never own the policy, the proceeds are not included in your estate. This strategy depends on whether the charity has an insurable interest in your life and may require your written consent.

Single-pay policy versus ongoing premiums

A single pay or single premium policy is one where you pay for your life insurance policy premiums in one payment. The single payment option is available with many types of life insurance. When you make your single pay policy payment, most of your money goes into the cash value. It also frees you from making future payments and saves money on administrative costs. These types of policies are subject to special tax rules.

Partial gift

Consider leaving part of a life insurance policy to the charity and the rest to your heirs. Do you think that your family would miss a 5–10% donation from your policy? All it takes is a beneficiary change form to your existing life insurance company.

Retirement Plan Strategy

One strategy to make sure your heirs are taken care of and to leave a legacy to the charity is to name the charity as beneficiary of a retirement plan and replace the value of the retirement plan with a life insurance policy to be left for the family. This way both may be left tax-free to the charity and heirs.

Other items to note

Please note not everyone is insurable. During the underwriting process, people sometimes find that they cannot purchase insurance due to a previously undiagnosed medical condition. Remember to contact a tax advisor to ensure you are properly structuring the gift for tax purposes.

Conclusion

Using life insurance as a legacy planning tool to help the Scottish Rite and its charities can help make a difference in the lives of others and potentially benefit you. How will you choose to leave your mark on this world?

For more information on using life insurance to support Scottish Rite charities or to get in touch with Mr. Fischer, please contact either Earl Ihle, 33°, Grand Cross, Director of Development, at 866-448-3773, eihle@scottishrite.org; Matt Szramoski, 33°, Associate Director of Development, at 866-748-3227, mszramoski@scottishrite.org; or Jeri Walker, Development Coordinator, at 202-777-3198, jwalker@scottishrite.org.