Are you one of many Americans who have too much life insurance? In last month’s visit I showed you how to determine how much insurance you need. In this visit, I’ll show you how to make the most of any excess coverage.
Obviously, we’re looking at permanent cash value life insurance policies. If you have too much term insurance, simply stop paying premiums and the policy will end. But permanent insurance builds up a cash value as well as the death benefit, so you have a valuable asset to exploit.
Under most policies, you always can either borrow from the cash value or surrender the policy and take the cash (less any penalties). But that won’t take full advantage of the insurance benefits you’ve paid for over the years. In addition, when you borrow against the cash value at some point in the future you might have to pay additional premiums to keep the policy in force.
A better alternative for many of you is to give the life insurance policy to charity. You’ll be able to take full advantage of all the premiums paid in the past and get a tax break today. Even better, by giving the policy you use the leverage of the life insurance to eventually give the charity a much larger gift than the cash you laid out for the premiums.
In most cases, after transferring a policy to charity you take a deduction equal to your cost basis in the policy, which usually is the total premiums paid over the years. When the policy is not fully paid up, you can make annual payments to the charity equal to the premiums and deduct those payments as charitable contributions. If you don’t want to continue paying premiums, many charities will pay them to keep the policy in force, though some will simply surrender the policy for its cash value.
When your gift exceeds $5,000, you’ll need to get the policy’s value appraised. The appraiser must be independent, so it will have to someone not associated with you, the charity, the insurer, or the insurance agent who sold you the policy. For gifts between $500 and $5,000 you don’t need an appraisal but must attach Form 8283 to your return.
To get the tax deduction, you must surrender all rights to the policy. That means giving up the right to change the beneficiary or to take loans or cash value withdrawals. You don’t want to give a policy with outstanding loans against it, because that might result in taxable income to you.
Giving a cash value life insurance policy to charity is a great way to turn the accumulated cash you paid in past years into a tax deduction today. But the rules can get tricky. Be sure you have a good tax adviser and that the value of your policy is appraised.