Giving Life Insurance to a Charity

June 13th, 2018 No comments

Make sure clients understand rules before taking action.

Life Insurance and associated tax issues are complicated. When you throw charity into the mix, it can get downright diabolical. It’s not as much that the rules are so complex, it’s that they don’t make sense to the typical taxpayer/donor.

Recently, I had another call about appraising a life insurance policy donated to charity. The one thing these calls have in common is that the policy in question was donated a number of months ago and only well after the fact did the policy owner understand the “special rules.” Very few people understand the tax and deduction rules before they make the gift. This also leads me to believe that whomever the donor is dealing with at the nonprofit in question doesn’t really know the rules either.

Bottom Line

When donating a life insurance policy, the deduction is limited to the lesser of the fair market value and the basis in the contract. What should be very apparent in this simple explanation is that cash value isn’t necessarily a data point that matters, at least as the policy owner generally believes it to be. You can imagine that this can become an issue when a donor realizes, after the donation, that the donated policy with a $100,000 of cash value is actually a very well-seasoned whole life policy with only a $10,000 basis.

Going to the rule above, the deductible number would be the lesser of the FMV, which we’ll call $100,000, and the basis, which is $10,000. That often isn’t the donor’s expectation. Many donors assume they’ll be getting a $100,000 deduction. By and large, the basis of the contract is going to be the cumulative premiums less any non-taxable withdrawals or distributions from the policy. In many cases, this will simply be the cumulative premiums paid into the contract over the years.

If the cash value of the policy is less than the basis, then we’re dealing with an even lower number, and a deduction isn’t available for even the premiums paid into the contract. This would likely be the case in fairly new policies or in underfunded or poorly performing life insurance policies.

Formal Appraisal

The other surprise facing donors of life insurance policies is the requirement to have a formal appraisal for a donation worth more than $5,000. This is especially irritating seeing that in many of these situations, the policies are modest and the FMV is obvious at a glance, yet the time and expense of the appraisal is still required. It seems a bit of a waste, which makes it especially important to find a very economical appraisal source for these purposes. This type of appraisal is probably very different from that needed for a trust transfer or to accompany a complex audit or a gift or estate tax return.

Conduct a Thorough Analysis

Given these issues, it might make sense to do a thorough analysis before the gift is made to determine if gifting the policy is even a good idea. What if the policy is worth significantly more than the cash value as a life settlement? I worked a situation for a $1 million policy with fundamentally no cash value. The policy owner was making payments to cover monthly mortality charges while I evaluated the settlement market. I ended up negotiating a $500,000 offer net to the owner. There was no conceivable benefit to donating the policy rather than selling it on the market and then donating the money.

Another time I received a call from a foundation because something seemed fishy. After I reviewed the paperwork, it turned out the policy the owner was trying to donate to the foundation was a completely loaned-out whole life contract that was going to collapse soon with massive phantom tax gains. The agent and policy owner thought it clever to let it fall off the books on the foundation’s watch, which would get the policy owner out from under the tax consequences. Except that it doesn’t work that way. The insurance company should and likely will issue a 1099 on the ownership change and the donor won’t have a basis or FMV appraisal to offset it.

It’s also a good idea to make sure you know how nonprofits will deal with a gift of life insurance. Some will maintain the policy, and others will summarily cash it out. If the latter is true, then why would a donor conceivably take a hit on the deduction if the policy isn’t going to stay in force anyway? In my first example above, we’re looking at an old whole life policy with very little spread between cash value and death benefit. If the donor cashed out the policy and donated the $100,000, the foundation still has all the money, and the donor actually comes out a hair better because his deduction is the same, but he saves the hassle and expense of an appraisal. If he wants, he can pay the taxes out of the cash value and donate the balance.

On the other hand, if the death benefit aspect of the policy is meaningful, we want to make sure the policy isn’t canceled by the nonprofit. A case I recently reviewed had a $1 million death benefit that was guaranteed and required no further premiums. Furthermore, the cash value was less than $100,000. Life expectancy of the insured was no more than 10 to 15 years. Unless the nonprofit believes in year-after-year extraordinary returns, nothing is going to touch that. However, some nonprofits categorically cash out life insurance policies. I can hardly think of a more ridiculous and contemptible policy, yet I see it.

The moral? Analysis before action. This applies to just about anything I can think of regarding life insurance, and action before analysis when donating life insurance policies can create extra heartaches. Don’t let the government take advantage of you even when you’re trying to do good.

Bill Boersma is a CLU, AEP and LIC. More information can be found at,, or email

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Is Working For One Life Insurance Carrier Ethical?

May 23rd, 2018 No comments

In some cases, agents may be crossing the line.

The life insurance world is certainly a lot different today than it was decades ago. Rather than just whole life and term insurance, there’s a wide menu of products available. Some products are driven by interest rates, some by market returns and some by indexes. Some are guaranteed while other aren’t.

Distribution models vary widely. There are internet marketing models, traditional agencies and independents who work though brokerage general agencies (BGA) that represent multiple insurance carriers, among others. One can get life insurance from financial advisors, banks, those predominantly in the property and casualty and health insurance market, traditional agents, etc. It seems the most unique way to get insurance today is through a dedicated life insurance agent. Times change. For full post, click here…

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Why Fund a Buy-Sell Agreement?

May 14th, 2018 No comments

Let’s take a look at the numbers.

Occasionally, I run into the business owner who questions the merit of funding a buy-sell agreement with life insurance. Some people are so anti-insurance they’ll say no regardless of what’s put in front of them.

I understand this sentiment. We’re sold on so many things so regularly that our automatic defense mechanism is often to say no. I’ve been there. However, there have been a number of times when I caught myself doing this and then challenged myself to listen, and every once in a while I came away with a different mindset. For example, this happened when I discovered that a commercial lawn service would treat my lawn several times a season for less than I was paying for the product to do it myself. For full post, click here…

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Defined Benefit Life Insurance

April 17th, 2018 No comments

Clients need to pay attention, as the world has changed
By Bill Boersma

In my ongoing effort to educate people on how life insurance works, I seek out new analogies and examples on a regular basis.

Along with others, I’ve written exhaustively about underperformance and management of life insurance. Charlie Ratner is fond of saying it isn’t underperforming, it’s under-explained. I completely agree. If your car runs out of gas and stops along the side of the road, is it really underperforming? Life insurance policies need gas, and if they don’t get it, they stop too. Fortunately no one at the dealership needs to explain this to society because a critical mass of people understand this and help educate others as they come along. For full post, click here…

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Life Insurance with an Infinite Return?

April 9th, 2018 No comments

Warn clients not to bail on policies.

An advisor recently called me regarding a client who has a $2.5 million second-to-die guaranteed universal life policy. The contract was put in force in 2012, so those who are familiar with the market understand that was near the bottom of the pricing curve. Nonetheless, the clients want to bail on this policy, purportedly due to the change in estate tax laws.

Given the fact that this policy is an unduplicable contract with a premium so relatively modest they probably can’t notice it, and noting the sunset provision and probable estate tax uncertainty moving forward, I’m not sure this is a wise choice, but it’s not for me to say. Maybe the kids have been ticking them off lately. For full post, click here…

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Life Insurance in Today’s Estate Tax World

March 22nd, 2018 1 comment

What to do with existing policies
By Bill Boersma

As might be expected, I’m getting more calls lately from advisors, on behalf of their clients, asking what should be done about life insurance no longer needed for estate liquidity purposes.

I generally answer the same way every time; “Let’s evaluate the policy and then talk about options.”  Depending on the client situation, the first issues I discuss with the advisor is what happens when the current estate tax law sunsets, and does your client really want to bank on what the tax laws will be, 17, 28 or 42 years from today?  With life insurance, it seems many people will jump on a reason to walk away. For full post, click here…

How Not To Evaluate Life Insurance

February 27th, 2018 No comments

I’m a life insurance guy and I feel a properly researched, constructed and managed life insurance policy can be an exceedingly powerful financial tool. However, my daily life is spent trying to find solutions to problems policy owners are experiencing. Decreasing crediting rates and increasing expenses are obviously issues but we deal with these kinds of things in many areas of life on a regular basis. For full post, click here…

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Help Mitigate Life Insurance Fraud

February 6th, 2018 No comments

Three rules to remember for layering in a basic level of protections for your clients.

While there’s likely no way to ultimately ensure your clients won’t be victims of fraud, there are a few things to be done that may help prevent it, as well as assist in recovery efforts if they’re victims. For full post, click here…

Understanding Life Insurance Performance – Part 2

January 19th, 2018 1 comment

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Digging Into the Black Box of Life Insurance

December 19th, 2017 No comments

Referring to life insurance as a “black box” goes back a long way, but just because life insurance may seem like a black box to you or your clients doesn’t mean it has to be. Some people understand it. It may not be healthy to foster an “us versus them” mentality, but it’s most certainly not healthy to ignore reality. When individuals don’t understand something, they seek out an advocate to ensure they have the information they need to make decisions in their best interest. Life insurance shouldn’t be any different. For full post, click here…

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