Gift of Policy

A simple, outright gift of an existing policy to charity may be eligible for an income tax charitable deduction. To gain an income tax charitable deduction, the policyowner must generally transfer all rights of ownership to a charity. If the donor reserves any rights in the policy, there is a gift of a partial interest to the charity, and the law is very clear that a gift of a partial interest is not tax-deductible. Thus, merely naming the charity as beneficiary will not result in a tax deduction.

The value of the gift will be the policy's replacement cost if paid-up. If further premiums are due, the value will be the policy's interpolated terminal reserve value, plus any unearned premium and accrued dividends, minus any policy loan. The insurance company will provide this figure on IRS Form 712.

Gift of Policy Subject to Policy Loan

Donors should be aware that donating a policy with a policy loan outstanding can be problematic—the loan will reduce the amount of the charitable deduction. Further, if the charity assumes the loan, the donor will recognize income to the extent the loan amount exceeds the basis in the policy at the time of transfer.

Simplicity is one of the major reasons charitable gifts of existing life insurance are so popular. The insured executes a simple assignment and change of beneficiary form—naming the charity as the owner and beneficiary of a policy—and files the form with the insurance company.

In the case of a new policy, the value of the gift is the initial premium that was paid directly or indirectly by the donor to bring the policy into existence [see Ltr. Rul. 200209020].

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