This bimonthly column, written by members of the Estate Planners Advisory Committee of the Federation Endowments Corporation, offers advice on insurance, estate, tax and investment planning opportunities to help both you and the community.
Did you know that life insurance can be a great tool to support your favorite charity? For the committed donor, the question is: "How can I best accomplish what I want?"
Life insurance is a leverage product.
An individual or a couple pays a little, and at some point, the beneficiary of the policy gets more back. The question then becomes: "How much do I have to pay to accomplish my goals?"
At life expectancy – about 86 for a healthy 60-year-old female and 83 for a male – the internal rate of return on some life policies can range from 5 percent to 9 percent. That means that if a person has invested the premiums, at 5 percent to 9 percent, after taxes and expenses for his or her life expectancy the beneficiary would receive what the policy provides.
Let's say, for instance, someone wants to leave $100,000 – or $1,000,000 – to a charitable organization, such as the Jewish Federation of Greater Philadelphia or to a person's university alma mater. By paying a fixed premium, these funds can be provided upon death. If the policy is structured properly with the charity as the controlling entity, the premiums effectively become tax-deductible.
There are more sophisticated and complex programs available where the same policy can be purchased with a financial institution, such as a bank or an insurance company lending the premiums. The cost now becomes the interest on the loan. In some cases, interest can accrue.
This results in no outlay of funds, at least initially. However, there is a cost if a person lives too long. Then, the loan becomes quite large, and an exit strategy has to be developed to stop the program. It does work, however, in many situations.
There are also programs available that could dispense funds to the charity initially, with no outlay to the donor. These fit specific situations, but do work within the right parameters.
Suffice it to say, life insurance is a viable and economical manner in which to create a fund for your favorite charity.
To get more information, speak to your agent, your attorney or call the Federation Endowments Corporation at 215-832-0572.
Howard Silverman, CLU, Ch.FC., is president of the HSA Corporation, a life-insurance organization.
Making a Gift of Insurance to Federation
• Existing Policy – Policies that are no longer needed can be transferred to Federation, with the organization being named owner and beneficiary. When the gift is made, the donor is able to deduct slightly more than the net cash value of the policy for income-tax purposes. Any gifts made afterward to allow future premium payments, if any, qualify for a current income-tax deduction.
• New Policy – Federation can purchase a policy on your life, with Federation designated as owner and beneficiary. Payments made to Federation for premium payments are deductible for income-tax purposes. The younger the policy-holder, the lower the premiums. More savings may be available for married couples if the policy is on both lives, and is payable at the death of the surviving spouse.
• Wealth Replacement – When an outright gift or planned gift is made to Federation, there are ways to "replace" the value of the contributed asset for one's family with an insurance policy. For example, the tax savings or earnings created by a charitable gift may be used to purchase a new policy held by an irrevocable insurance trust. The insurance proceeds can pass for the benefit of the family free of estate taxes, while creating a significant permanent endowment fund.
For more information, call Rachel Gross, acting director of the Federation Endowments Corporation, at 215-832-0572.