Charity is a virtue in most religions and philosophies. Giving money or other assets to worthy causes is something that tens of millions of people participate in every single year. Whether the donations are big or small, people willingly donate their hard-earned wealth to causes as diverse as education, health-care, clean drinking water, animal welfare, scientific discovery, and food security. They do it because they believe in those causes, and know that the achievement of noble ends takes money: now, what if there were an easy way to multiply that money, and leave a gift potentially many times greater than what an individual good give through conventional means?

One excellent option to achieve such multiplication, or, leverage, is through the purchase of whole life insurance. While life insurance is normally thought of, and holds the primary role of, providing security for one’s family in the event of a breadwinner’s death, whole life insurance can also be used as a tax efficient, leveraged, and tax-deductible means of charitable wealth transfer.

A brief disclaimer, first: check the local tax code and other relevant laws before acting on any of this information. With that out of the way, how does philanthropic life insurance work?

First, select the organization you wish to make a gift to. Decide how much money you want to give: you can think of this on a monthly, annual, or single lump sum basis.

Next purchase a whole life insurance policy, at a premium (price) equal to that monthly, annual, or lump sum donation. Whole life policies, a form of permanent coverage, are designed to guarantee coverage for the insured’s entire life span. (Technically, most policies phase out at age 100 or 121, at which point the death benefit is returned to the living insured.) Once you’re approved health-wise for the coverage, you’ll know exactly how much your donation, in the form of that premium, is leveraged, meaning: what death benefit, certain to be higher than whatever you’ve paid in premium, will your selected beneficiary or beneficiaries receive upon your death?

Life insurance essentially allows you to pay a little bit of your money, in order to receive, or donate, a much larger chunk of the insurance company’s money. You’re buying dollars for pennies. The effectiveness of the leverage will depend on factors such as your age, sex, health, and tobacco status, but here are a few hypothetical (though realistic examples):

• For a lump sum premium of $68,000, a 35 year old man could leave a death benefit upwards of $250,000.
• A 65 year old woman paying a $100,000 lump sum in premium could leave at least $163,000 to the charity of her choice.
• For the annual premium of $1,600, a 40 year old man could leave $100,000+ to his chosen organization.

The money you actually pay gets multiplied. Make sense?

Another feature of whole life policies is that as you pay premiums, they not only guarantee a minimum death benefit (also known as face amount) for the beneficiary of your choice, but they also accumulate a cash value. This cash value grows based on either market returns (similar to mutual funds), or at a fixed interest rate, depending on the specific product. That growth enlarges the death benefit, and, a portion of it is accessible to the owner of the policy, while the insured still lives.

So, once you have your chosen organization set as a beneficiary, you know how much you’re paying in premium, you know how much that beneficiary will receive upon your death, you’ve qualified for the coverage, and you have at least a rough idea of how that pre-death accessible cash value will grow, what next?

Donate the policy itself to the charitable organization. They’ll have access to the accumulating cash value for their operations, meaning you can see at least some of the results of your philanthropy. You’ll receive a charitable tax deduction for all premiums paid. And, upon your death, the organization will receive a much larger, leveraged, and completely tax-free sum of money. (Again, check laws where you live, but there’s little to no restriction on this across the United States.)

To sum up: if you’re donating money to a worthy cause, whole life insurance is a wonderful option to help you multiply that money, while retaining all the same tax advantages of conventional forms of philanthropy. Life insurance is much more than just insurance: it’s also a highly effective wealth transfer tool.

By: Geoffrey Wilson