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Life Insurance Can Be a Smart Tool for Estate Planning and Charitable Giving

Posted on September 1, 2021
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Life Insurance as an Estate Planning Tool

The first, and probably most common, role of life insurance in your estate plan is the overall need for it. It can help financially by offering your family long term replacement of lost income and benefits, and by covering immediate costs, such as medical bills and funeral expenses. It can also provide the emotional benefit of peace of mind, knowing that if something happened to you, your family wouldn't be left financially insecure.

Here’s a tip: life insurance can be a tax-savvy estate planning tool, too. For instance, if you won't have any need for your IRA or 401k to pay for your retirement, then you can cash out the account, pay the income tax, and then invest the balance in a life insurance policy. When you are gone, the proceeds will pass to your heirs free of estate and income tax. Compare this with leaving your money in the IRA or 401k, which will pass subject to both income and estate taxes when you die.

Life Insurance as a Charitable Giving Tool

There are several different ways that you can structure a tax-savvy charitable gift of life insurance:

  1. You can make a charity, like Drexel University, a beneficiary of an existing life insurance policy. Upon your passing, the full face-value amount of the policy will go to the charity. To add a charity as a beneficiary of an existing life insurance policy, simply request a beneficiary designation form from your employer or insurance company.
  2. You can make a charity the owner and beneficiary of an existing, paid-up life insurance policy. By doing so, you may be able to deduct an amount equal to the fair market value of the policy or your cost basis, whichever is less. Since the charity becomes the owner of the policy, the proceeds will not be included in your estate for tax purposes.
  3. You can make a charity the owner and beneficiary of a policy on which you are still paying premiums. You may be able to deduct an amount equal to the approximate cash value of the policy or the policy's cost basis, whichever is less, in the year in which you give the gift. You may also be able to deduct any future premium payments, and the proceeds will not be included in your estate for tax purposes.

Questions? Contact David Toll, JD, senior associate vice president, Drexel University Office of Gift Planning at 215.895.1882 or giftplanning@drexel.edu.

Posted in Retirement Assets, Tax Smart Giving

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