New ways to make charitable gifts during a client's lifetimeArticle added by Larry Simon on August 18, 2009
Larry Simon

Larry Simon

Joined: August 13, 2008

There is a common misperception that it is only possible to use a life insurance policy as a vehicle to make a charitable donation upon maturity. While that is still an option, life settlements are enabling seniors to further philanthropic goals during their lifetimes.

While life insurance has long played an important role in charitable gifting strategies and continues to do so, in recent years, life settlements have emerged as a powerful tool in the estate planning arsenal as, well.

In the past, seniors who needed new insurance coverage or no longer needed their existing policies had few options -- either surrenders their policy for often-low cash-surrender values or allows their policy to lapse. Seniors today have the ability to use life settlements as a means of accessing funds that may have been lost if a policy had been surrendered or lapsed. Additionally, high-net-worth seniors who are looking to donate to charity can use the money garnered from a life settlement transaction to fund a charitable gift without dipping into other assets.

Why use a life settlement to donate?

Even before the development of life settlements, use of life insurance to bestow a deferred gift or as replacement for assets used to fund a charitable gift was not uncommon. Although many seniors who used this option intended to donate their policies to help benefit philanthropic organizations, they sometimes left such charities with ongoing and burdensome responsibilities. Many charities that received gifts in this way were forced to dedicate needed resources to attend to the administrative requirements of trusts, carrier paperwork and gift accounting, while also dealing with escalating premiums on some policies. Additionally, organizations often had to wait long periods of time for policy benefits to become accessible.

Due to these issues, both donors and charitable organizations sometimes chose to surrender policies and use the cash-surrender amount to fund the donation. While this option reduced problems with insurance-policy donations, it also resulted in charities foregoing significant amounts of money, which may have been realized if the policy had been sold in the secondary market. Using life settlements to fund donations gives seniors the ability to achieve their gifting goals without leaving their designated charity with expensive and time-consuming issues. It also provides financial professionals with an opportunity to work directly with benefactors in order to ensure that the market value for their clients' policies is maximized.

Charitable organizations still need support

Charitable organizations continue to look for donors, and according to Giving USA 2007, a yearbook on philanthropic activities published by the Giving USA Foundation, overall giving has historically increased. Some organizations have seen an upsurge in donations following natural disasters, while others have experienced a rise in funding for the arts and culture. While gifting may be up in some areas, there are always charities looking for ways to increase support. For clients who want to give but do not have the funds readily available, a life settlement may help to finance a donation, while also allowing seniors to see their gifts make a difference during their lifetimes. In summary, life settlements offer an innovative resource and strategy for donors to tap funds that they may not have realized were available.

Gifting with life settlements -- when is it appropriate?

For seniors looking to give, there are some situations when donating a life-insurance policy directly to a charity may prove an effective option. For instance, when the benefactor and charity are unable or unwilling to meet the continuous administrative and premium obligations associated with the policy, using a life settlement may provide a more attractive alternative. The settlement of the insurance policy in the secondary market generally allows clients to generate more proceeds than would be possible by surrendering the policy to the issuing insurance carrier. The proceeds of the settlement can then be donated directly to the charity, eliminating the need for ongoing administration of the policy.

Life settlement funded donations and tax impact

If a client determines that a settlement transaction is appropriate and wishes to use a portion or all of the settlement proceeds to fund a charitable donation, he or she may be able to benefit from an associated income-tax deduction. However, recent tax law changes have impacted the amount of income tax payable in connection with the sale of a life insurance policy by an original owner to a third party. Clients who are considering life settlements, therefore, should consult with their independent tax and financial advisors before engaging in any life settlement transaction.

Learn more now

Financial professionals who would like to find out more about life settlements and the opportunities they can provide to senior clients can visit industry-related Web sites such as the National Association of Insurance Commissioners (NAIC), National Conference of Insurance Legislators (NCOIL), Life Insurance Settlement Association (LISA) and Life Settlement Awareness Month (LSAM)® sites. With the right information, financial professionals will be able to further fulfill their professional responsibilities to clients by offering seniors more options for donating.

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