Life insurance policy is a contract between the named insured and the insurance company wherein the insurance company agrees to pay an agreed upon sum of money to the insured's named beneficiary, so long as the insured's premiums are paid current.
The cost of life insurance depends on such factors as the insured's age, health, and occupation (or if a “second to die” policy, then the additional insured’s factors as well). The extent of coverage (amount of death benefit) and the cost of life insurance (the premium amount) are determined by the insurance company from the donor’s application for insurance, a medical exam of the donor, and other relevant information requested. From this information, the insurance company will provide an “illustration of coverage” describing the extent of coverage and the premium required to purchase the coverage. The policy does not become binding until the policy is signed and the initial premium is paid.
A charity generally accepts a universal whole life insurance policy (the most common type used as a charitable gift) under one of three scenarios:
Donor Owns Policy and Names FIU as Beneficiary: The donor simply lists the charity as a beneficiary in the donor’s policy.
Donor Assigns Ownership/Sole Beneficiary Status of Existing Policy to the Charity: The donor, with charity’s agreement, signs the insurance company’s form assigning of ownership of the policy to the charity and with the charity as the sole beneficiary. If premium remains due on the policy, the donor will be required to make a pledge agreement with charity to pay an amount which is the equivalent of the premium due, and the charity will undertake to pay the premiums directly.**
Donor Applies for New Policy with the Charity as Owner and Sole Beneficiary: The donor applies for the policy as the insured and the charity signs as the owner of the policy. The donor will be required to make a pledge agreement with the charity to pay an amount which is the equivalent of the premium due, and the charity will undertake to pay the premiums directly.*
*This technique allows the donor to take a charitable income tax deduction for both the pledge payments as well as any cash value in the policy.
** This technique allows the donor to take a charitable income tax deduction for the pledge payments”
Where It Works
Donor wants estate tax or income tax deduction
Donor wants to benefit charity in the present and/or future
Donor wants something revocable or irrevocable
Donor receives philanthropic recognition
Life insurance is a form of insurance that pays monetary proceeds upon the death of the insured covered.