5 insurance strategies to maximize your generosity
The classic definition of insurance is protection against the risk of future loss, but did you know that insurance can also play a key role in maximizing your charitable giving and generosity?
Estate planning attorneys and CPAs have long understood the value of using insurance as a key component in their seemingly Rube Goldberg Machines of wills, trusts, and other interlocking parts. While it’s always wise advise to speak with your own personal tax or financial advisor before making any important financial decisions, here are five insurance strategies that you can broach as topics the next time you meet with an eye to increase your generosity.
1. Permanent life insurance with charity as beneficiary
99 percent of the time, term life insurance is the best life insurance option for almost everyone. However, when you begin to think about estate planning and charitable giving, then you are squarely in the center of that 1 percent of the time where permanent life insurance policies are worth considering. The best way to contrast the difference between term life insurance and permanent life insurance (and all of it’s permutations) is that term life insurance only pays out a death benefit if you die within a certain “term” (30-year term, 10-year term, etc.) while permanent life insurance, provided you make the required premium payments, will always pay out a death benefit upon your death. So, given that everyone will die one day, though only God knows if that will happen within a certain “term” or not, then if you want to guarantee that a charity will receive the death benefit proceeds, you will necessarily want to consider a permanent life insurance policy.
The easiest way to make sure this will happen is simply to make the intended charity the beneficiary of a permanent life insurance policy owned by you and insuring your own life. Provided you continue to make the premium payments, and provided that the claims-paying ability of the life insurance company is not compromised, then the charity is guaranteed to receive 100 percent of the death benefit proceeds upon your death. This strategy, in addition to its simplicity, also has a number of potential income tax and estate tax benefits: life insurance proceeds paid to a charity are generally not subject to income taxes, estate taxes, or probate costs, and depending on how the gift is structured, there may also be income tax deductions available for premiums paid.
2. Permanent life insurance with charity as owner and beneficiary
This second strategy is quite similar to the first, but with an important difference. Here, same as with the first strategy, a permanent life insurance policy is taken out on your life with the charity as the beneficiary, but with this second strategy the charity is the owner of the policy. This can be accomplished in one of two ways:
A) You irrevocably assign the policy to the charity.
B) The charity, with your permission, takes out the policy on your life from the very beginning. An amount equal to the annual premium payment is gifted each year to pay the premiums.
3. Charitable remainder trust (CRT) paired with an irrevocable life insurance trust (ILIT)
This third strategy can get complicated quick, so as with each of these strategies, be sure to discuss this option with a qualified tax and financial advisor. This strategy usually works best when you have significant income-producing assets that you would like to gift to a charity while still being able to enjoy income from those assets.
Placing those income-producing assets inside of a CRT allows you to take a current year charitable gift tax deduction while still receiving or directing the income from those assets for a certain time period. The addition of the ILIT provides a way to replace the value of those assets – now headed for charity because of the CRT, remember – upon your death and pay out to your heirs or wherever else you may specify while keeping the death benefit proceeds out of your estate.
4. Buy health insurance as a stable foundation to insure against downside risk
You’ll notice this article is titled “Insurance Strategies” and not just “Life Insurance Strategies” so these next two strategies involve health insurance and Medicare insurance, respectively, and are decidedly less common. In a nutshell, the philosophy behind this fourth strategy is that protection against downside risk encourages future generosity. Medical bills play a large part in many bankruptcies, so if you take steps to protect against your own downside risk using adequate health insurance coverage then you can then be prepared to give generously to others.
Think of it like this: large, unforeseen medical bills can not only wipe out savings, but future gifts too. Though insurance is not explicitly referenced, there is certainly an element of wisdom from Proverbs that speaks to this foundational strategy too.
Proverbs 24:27 says, “Prepare your work outside; get everything ready for yourself in the field, and after that build your house.”
While the common interpretation of this verse involves more of an injunction against spending on non income-producing items (even assets, like a home) before income is determined to be stable, there is a hidden corollary that is quite appropriate: don’t plan to give money that could be wiped out by a large, unforeseen medical bill if it’s in the power of your hand to limit your downside exposure.
To a lesser extent, this type of downside protection philosophy also applies to purchasing car insurance and other similar products. Even relatively common misfortunes like getting into a car accident can quickly spiral into problem after problem when all the hidden costs of driving without adequate car insurance coverage add up. The goal is not to insure against every type of future risk – an impossible task, anyway – the goal is to limit future unexpected out-of-pocket expenses such that you can plan to give and stick to that plan!
5. Donate required minimum distributions (RMDs) as qualified charitable distributions (QCDs) to lower modified adjusted gross income (MAGI) and thus lower medicare premiums.
This last strategy is an obscure one, and only tangentially related to insurance, but it’s just too good not to share. So, it’s worth stating up front that this strategy applies to a narrow slice of the population: those age 70 ½ or older, and therefore subject to IRA Required Minimum Distributions (RMDs) and also those whose income is such that they are subject to Medicare premium surcharges.
Essentially, it works like this: the higher your Modified Adjusted Gross Income (this number, also called MAGI, is essentially the Adjusted Gross Income, AGI, number on the front of your personal tax return, after adding back certain IRS-specified deductions) then the more likely you are to be hit with a Medicare premium surcharge for Medicare Part B. So, you could do your charitable giving the usual way: take a distribution from your IRA – you have to take money out; it’s called a “Required” Minimum Distribution for a reason – and then gift that money to a charity and receive the charitable gift tax deduction as an itemized deduction, subject to limitations, but unfortunately, that RMD still shows up as income on your 1040, thus increasing your MAGI calculation for Medicare premium surcharge calculations.
Instead, what if you gifted your RMD directly to charity, called a Qualified Charitable Distribution (QCD)? Now, the distribution doesn’t increase your MAGI calculation, potentially limiting your Medicare premium surcharges, and allowing you more freedom to direct your money to the charity of your choice, or wherever you may choose, instead of Uncle Sam!
One important note about this fifth strategy: the IRS calculation for determining any Medicare premium surcharge uses the MAGI from tax returns filed two years ago. So, your 2016 MAGI determines your 2018 Medicare premiums, and your 2018 MAGI determines your 2020 Medicare premiums. All the more reason to begin sooner rather than later evaluating with your tax and financial advisor whether this is a wise planning strategy for you!
Ultimately, this 5th strategy is just one example of many that illustrates the foundational principle of smart generosity: the less money you have to send to Uncle Sam, by way of wise and legal planning strategies, then the more money you are able to give!
by Joel OhmanJoel Ohman is a Certified Financial Planner, serial entrepreneur, and author. He is founder of MedicareInsurance.com, CarInsuranceComparison.com, and a number of digital media startups.