Paid Up Life Insurance Policy As A Major Gift: A Proverbial Win-Win

Nearly 95% of all planned gifts are made through bequests. These gifts in someone’s last will and testament come to your organization well after the donor’s initial commitment was made and usually without you having been aware of the designation. But there are many other ways to encourage your donors to make planned gifts. It is important for you to be well-versed in various planned giving options. Let’s take a look at one of those options: how a donor’s life insurance policy can be turned into a major gift.

Through prospect research, or a conversation with your donor, you may find that one of your supporters owns a fully paid up life insurance policy that no longer serves its original purpose. A common example is a policy providing for a child where the child is now an adult, is employed, has limited debt, and assets which more than satisfy his/her short and long term financial needs. Under this scenario, making a gift of the life insurance policy could be beneficial to both the donor and recipient nonprofit.

Consider the following, using an example of a policy with a death benefit of $100,000 and cash value of $60,000:

  • The $60,000 cash value may be claimed as a charitable tax deduction.  Applying the formula of IRS allowable 20% of adjusted gross income for a charitable deduction (if income totals $300,000 or more in the year in which the policy is gifted), the entire $60,000 sum may be claimed as a charitable deduction.  If adjusted gross income is lower, the donor may spread the $60,000 deduction for a period of up to 5 years beyond the year in which the policy is gifted.
  •  The nonprofit recognizes the donor’s gift at the $100,000 death benefit amount; therefore, if there is a naming opportunity available, it would be calculated on this amount.
  •  Because the policy is fully paid, there is no current “cost” to the donor to make the gift. In fact, the donor receives a tax deduction and a financial benefit.
  • Options to the nonprofit are:
  • As owner, it may redeem the policy and receive the $60,000 cash value.
  • It may hold the policy until the donor passes and, as beneficiary, receive the $100,000 death benefit.
  • It may borrow against the policy for an amount up to the cash value, thus receiving ready cash while retaining the policy for a portion of the available death benefit. Therefore, if there is an unpaid $50,000 borrowed balance against the cash value at the time of insured’s passing, 50%, or $50,000, would pass to the nonprofit from the $100,000 death benefit.

A paid-up life insurance policy is a simple, uncomplicated way to provide an important benefit to your nonprofit. The beauty of this type of gift is that all parties enjoy the proverbial win-win.  At no current outlay of cost, the donor gets the satisfaction of contributing to a nonprofit where there exists a compassionate alignment of values, and the nonprofit receives an asset-based gift which will help to fund its urgent and compelling needs and advance its mission.

When working with potential major donors it is important to have a full understanding of the way assets can be used to make gifts. You may find donors who are strongly value aligned with your cause, but do not have an understanding of the important ways they can leverage their support of your work. As a frontline fundraiser, it is critical that you do. Sometimes, even a simple article in your agency newsletter about planned giving can surface prospects.

 

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