This monthÂ’s financial planning article focused on meeting your life insurance needs. If you are young and just starting a family, you might have realized that you need more insurance than you presently have. But if your children are grown and your nest egg is secure, you might find yourself with more insurance than you need. If this is the case, what are your plans for it?
You could maintain the policy. Or you could eliminate some of your insurance coverage and invest the savings. For some policies, dropping the coverage is easy and comes with no cost, but canceling other policies might have tax consequences. If you have a permanent policy (see below) that you acquired when you were young, you might be paying low premiums for a substantial amount of coverage, so youÂ’ll want to think twice before surrendering the policy.
There is another option that wonÂ’t break your bank: Use your life insurance to leave a lasting legacy for your favorite cause.
First, letÂ’s review the basic types of life insurance offered in the marketplace:
The simplest type of policy is term insurance. It is also the cheapest. With this, you pay your premium and if you die while the policy is in force, your beneficiary gets the face value of the policy. There is no cash buildup and if the policy lapses, you get nothing. The drawback to term is that it typically expires on a periodic basis and the premium increases. The older you are, the more expensive the policy will be.
Whole life is a policy that lasts as long as you pay the premium. The premium is fixed on the date of issuance and never increases or decreases. Whole life will build up some value and the earnings will accumulate tax free.
Variable life, like whole life, is a permanent policy. Unlike a whole life policy, though, the value is not fixed. The value of the cash buildup depends on the investment results of the policyÂ’s investible assets.
Universal life and variable life policies are also permanent products that allow you to build up a nest egg but are a bit more flexible than whole or variable products.
If you choose to reduce insurance benefits available to your heirs in favor of a charity, your tax results will depend on the type of policy you use. Here are a few options you should consider:
You opt to purchase a straight term policy and name a charity as your beneficiary. If you want to receive a tax benefit for your efforts, the charity will obtain the insurance on your life and you will make periodic contributions to pay for the cost of coverage (the premium). Unless you relinquish all rights and ownership, you will not receive a charitable deduction.
Now back to the term example. ItÂ’s fairly simple. The charity will purchase an insurance policy on your life. You will make a charitable contribution to them to cover the premium and you will receive a deduction. When you die, the charity will receive the proceeds of the death benefit.
If you have a policy that you no longer need and it has accumulated a cash value, you can contribute that policy to a charity of your choice. If you do so, you will not necessarily get a deduction for the full cash value. In general, you will receive a deduction equal to the premiums you have paid or the value of the policy, whichever is less. In order to maximize the value to the charity, you would then make annual contributions to pay the premiums as they come due. If the cash value is adequate, the charity can even use that to pay for the premiums.
The drawback to the outright gift of a valuable policy is that you lose all control over it and have no access to the cash value if you need it. The solution is to name a charity as your beneficiary but retain ownership of the policy. This will give you access to the cash, but you will not be able to take a charitable deduction for the premiums you pay.
The ability to leave a substantial legacy to a charity is not just for the super wealthy. With a little planning, you can provide substantial benefits to a charitable cause by using life insurance. The foregoing ideas are just a few of the many techniques available when using life insurance. If you are interested in helping your favorite cause through an outright gift or as part of a planned giving strategy, call us to discuss some of the ways you can use insurance to benefit a worthy cause.
Have a terrific June.