What if you could make a significant difference for a cause that you really care about, without reducing your assets (or those of the next generation)? What if you could actually give money away and save money at the same time? Well, if you qualify for more permanent life insurance than you need, you can. In that case, a little money goes a very long way. Here is how:
Check your Eligibility
When your net worth is greater than what you need in life insurance, then you have a dormant asset. The unused capacity, or your excess insurability, has a value. For example, if your net worth is $20 million, and you only need $10 million in life insurance, then you have $10 million in excess insurability.
Let’s say that you would like to help orphans in other countries. Or help find ways to ensure that developing countries have clean water, or help find a cure for Lou Gehrig’s Disease. Or any other equally valuable cause. You could use your excess insurability to donate life insurance to your favorite charity, giving them several million dollars at little or no cost to you. Imagine their delight when you let them know. Imagine the type of impact your money could have.
A Little Homework
Step 1
You’ll want to start by consulting with legal and financial professionals. Together, you can reach out to an insurance company to find out your exact insurability, and determine premium pricing. At the same time, reach out to a bank to obtain a loan that will cover the insurance premiums. When you finance the premiums, you will be paying a fraction of the premium cost. The death benefit will be paid out to the charity tax-free, less any outstanding loan amount.
Step 2
Be sure that your preferred charity is willing and able to take the donation of your insurance policy. Some states require that a charity must have an insurable interest in an individual donor, preventing them from holding a life insurance policy.
Let’s Get Down to Business
Now you are ready to set up the insurance policy, with the charitable organization named as the beneficiary, and then gift the policy to the charitable organization. There is no gift tax on donations to qualified charities. But there are a few important considerations:
- Be sure that you don’t retain any ownership rights, such as the right to change beneficiaries, or the policy may not be removed from your taxable estate.
- Get a qualified appraisal for the total value of your donation from an independent 3rd party if you plan to take any income tax deductions.
Make an Impact
Let’s use the example of $10 million in excess insurability. Let’s say you gift an insurance policy with a death benefit of $10 million to your favorite charity, and the premium payments are $25,000 per month. By financing the premium payments, however, you will pay only a portion of the premium amount. In this case, with $300,000 total in annual premiums, and assuming a 5% interest rate, the loan payments are a total of $15,000 per year. Assume you pay for 10 years, and then the charity receives the death benefit. The total donation they receive will be $7.2 million (the $10 million death benefit, less the total of $2.8 million owed to the bank). Compare that to the total of $150,000 you actually paid. You can’t beat that in terms of bang for your buck; that’s a 4,667% return.
Here’s the Kicker
You may also claim an income tax deduction (up to 50% of your adjusted gross income [AGI]) on the premium payments.
Let’s use the above example, and take it even further. Assume you are in a 37% income tax bracket, and your AGI is $3 million per year, so your charitable deduction limit is $1.5 million (50% of your AGI). If you donate $300,000 per year in premiums directly to the charity, you may be able to deduct the entire amount on your tax return, saving $111,000 in taxes (here we assume that the premium payment is less than the cash value – otherwise the tax deduction will be based on the cash value amount). This could be up to a $1.11 million savings over the course of 10 years, completely overshadowing the $150,000 you spent out of pocket.
When all is said and done, you will have given over $7 million to your favorite charity, and gotten a significant tax savings at the same time (plus your name written in lights at the charity of your choice).
Already Have Too Much Insurance? No Problem.
If you already have an insurance policy that you no longer need, you can simply gift the existing policy. You can deduct any ongoing premium payments (or the cash value, whichever is smaller) for income tax purposes (as we noted above). This will also have the added tax benefit of removing the policy from your estate.
If you are interested in finding ways to make a significant impact by using your excess insurability, Axia Global can help you or your affluent clients get started. Just give us a call. It is our goal to make a measurable difference in your financial life.
Note: the statements above should not be considered financial, legal or tax advice, but ideas for careful consideration with your trusted financial advisors and lawyers. For current tax or legal advice, please consult with an accountant or an attorney.
