A Powerful Gifting Vehicle for Charitable Causes


Andrew Carnegie once said, “It is more difficult to give
money away intelligently than it is to earn it in the first place."

Life insurance has historically played a key role for many individuals who wish to give their money away intelligently. By naming a charitable organization the policy’s beneficiary, life insurance has the power to magnify the impact of the client’s gift and thus their ability to make a truly meaningful impact on a cause they hold dear.

The emergence of the secondary market for life insurance (life settlements) expanded the opportunity for individuals to make large cash gifts to charities, and opened the door for non-profits to more effectively optimize the value of the donated policies that they manage.

While there are numerous ways to structure life insurance or use the proceeds from a life settlement to benefit a charity, some of the most common examples of charitable giving involving life insurance and life settlements include:

  • Making the charity the beneficiary of an existing life insurance policy. .
  • Donating the proceeds from a life settlement as a charitable cash gift.
  • Gifting an existing life insurance policy to the charity, making the charity the owner and beneficiary of the policy.
  • Working with a charitable foundation to purchase a new life insurance policy where the non-profit becomes owner and beneficiary of the policy

The fourth example above is often used in conjunction with a tax planning strategy for high net worth individuals. Instead of making a series of cash gifts to a charitable organization over a number of years, financial advisors often recommend that the donor work with the development director of the charity to apply their cash gifts toward buying a life insurance policy with the non-profit as owner and beneficiary of the policy. In addition to making a large endowment to one’s favorite charity without depleting the cash assets in the estate, the charitable gift of a properly structured life insurance policy can also result in income to the insured and/or an estate tax deduction.

Some Non-Profits Prefer Cash Gifts over Donated Policies

When it comes to charitable gifts, many non-profits take the position that cash is king. They would much rather make immediate use of a cash contribution – whether it be to fund projects, to build endowments, or for portfolio investments.

The preference for cash results from the fact that policies that have been donated by the insured typically must be maintained and managed by the charity. Some donated policies might require the charity to make premium payments to keep them in force, while other policies require annual reviews and monitoring to insure the cash build up in the policy is not being depleted due to the lower interest rate environment. The management of donated policies often becomes onerous for the charity and most do not have the staff or expertise to do so.

Intelligent Giving Via Life Settlements

Prior to the emergence of the life settlement marketplace, some charitable organizations would simply cash out donated life insurance policies for a small surrender value. It never occurred to them that the policy could be worth substantially more than the small cash surrender value offered from the carrier who wrote the policy.

Within the past 10 years, more charitable organizations are becoming aware of the secondary market for life insurance and how it provides a more intelligent approach to optimizing the cash potential for troubled life insurance policies.

Case Example: Proceeds from Life Settlement Help Fund College Scholarships

This success story involved the life settlement on a $5 million survivorship policy owned by a charitable family foundation to provide college scholarships to needy students. The foundation was struggling to pay expensive premiums on this policy and asked Asset Life Settlements to explore the foundation’s options in the secondary market.

Transaction Details:

  • $5 million Foundation-Owned SUL (survivorship policy
  • $221,000 Annual Premiums
  • $119,000 Cash Surrender Value
  • Settlement Offer: $2 million Retained Death Benefit (or paid up policy) with institutional buyer maintaining premiums
  • Foundation is listed as irrevocable beneficiary for a $2 million death benefit

After submitting the case to multiple funders, we were able to present the foundation with one of two choices:

  • Accept an immediate cash settlement of $450,000
  • Accept a $2 million paid up policy, the proceeds from which the foundation would receive after both of the insureds passed away.

The compelling aspect of this second option was the fact that the foundation would no longer have to pay premiums on the policy, and they would retain a $2 million paid up policy for an irrevocable beneficiary of their choice, which in this case was the foundation. The foundation viewed this second option as the most favorable solution, because the money that would have gone toward the annual premium payments of $221,000 could now be used for student scholarships.

Andrew Carnegie once said, “It is more difficult to give money away intelligently than it is to earn it in the first place.

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