Life insurance has long been used as a financial tool for estate and tax planning purposes. Because the original purpose of the coverage often diminishes over time, individuals sometimes donate unneeded policies to non-profit organizations. By doing so, donors can make an impactful contribution to a charity they love.
However, managing donated life insurance can be complex. Here are the most common pain points we hear, and how to avoid them.
PAIN POINT: Donor Priorities Changes
Two common reasons a donor’s priorities may change over time:
PRACTICE TIP: It can be difficult to have conversations about longevity or ask for more to fund a donated policy, especially if the donor didn’t plan for it. In these scenarios, the charity risks losing a sizable donation. Before any decision to lapse, surrender, or materially change the policy, have it appraised to determine the Fair Market Value. This will help both the donor and the foundation make an informed decision on what to do next.
ALTERNATIVE TO SURRENDER: In some cases, the policy could be exchanged for more than the cash value. A life settlement is the sale of an existing life insurance policy for more than the cash surrender value and less than the face amount. This means the charity would get more than it would if the policy was surrendered for cash value, and the donor would see the donation put to use during their lifetime.
DONATED POLICY RUNNING OUT OF CASH VALUE
The life settlement created liquidity the charity could use for today’s needs, and Edna could witness her donation being put to work. See Story
Schedule a call to discuss how we help you integrate life settlements and life insurance valuation into your client conversations, share tools that will help you get started, and calculate the opportunity for your firm and clients.
PAIN POINT: Donor Fatigue
The generosity of donors is the backbone of a foundation’s success. But donor fatigue is a real challenge. In addition to sharing the tangible difference their contributions make, a new ask can inspire ongoing support and foster relationships.
INNOVATIVE APPROACH TO GIFTS OF LIFE INSURANCE: Life insurance is an asset and has property rights. This is the reason it can be donated in the first place, but it also means it can be valued and sold like any other piece of property. Instead of donating the policy, the policy owner can sell the policy and donate all or a portion of the proceeds.
Donor Benefits:
Foundation Benefits:
DONOR LIQUIDITY CONSTRAINTS
The life settlement eliminated the future premium obligation and allowed the donor to put an unneeded asset to good use. See Story
PRACTICE TIP: DEMONSTRATE STEWARDSHIP WITH QUALIFIED APPRAISER FOR FORM 8283
Demonstrating stewardship means showing donors that their contributions are being used wisely, effectively, and in alignment with their intentions. Strong stewardship builds trust and strengthens donor relationships, making them more likely to stay engaged. Reminding donors who gift a life insurance policy that an appraisal is needed for Form 8283 and providing a resource will eliminate potential frustration and encourage continued giving.
The IRS requires the use of a qualified appraiser for charitable gifts of donated property with a fair market value of more than $5,000. Form 8283 is a tax form used by individuals, partnerships, and corporations to report noncash charitable contributions when the amount of their deduction for all noncash gifts is more than $5001. This form is used to claim a deduction for a charitable contribution of property or similar items of property, the claimed value of which exceeds $5001.
As an independent qualified appraiser of life insurance policies, we can provide the valuation needed to complete Form 8283.
Ashar Group is a nationally licensed life settlement firm that protects the best interests of policy owners by creating a competitive policy auction to deliver the best value to the seller. Ashar Group does not sell life insurance, manage assets, or purchase policies. We are an independent resource for fiduciary advisors and their clients specializing in life insurance valuation for planning purposes.
