14. Life Insurance in Charitable Planning, Part 4 of 4

14. Life Insurance in Charitable Planning, Part 4 of 4

Article posted in General on 27 July 2016| comments
audience: National Publication, Russell N. James III, J.D., Ph.D., CFP | last updated: 28 July 2016
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VISUAL PLANNED GIVING:
An Introduction to the Law and Taxation
of Charitable Gift Planning

By: Russell James III, J.D., Ph.D.

14. Life Insurance in Charitable Planning, Part 4 of 4

Links to previous sections of book are found at the end of each section.

A third use of life insurance in charitable planning is to create a new policy specifically intended to benefit the charity at the death of the donor.  In this way, the donor may provide for a large posthumous charitable gift, perhaps funding a significant charitable project.  Without the use of life insurance, a donor could fund such a posthumous gift by simply saving up money in a donor advised fund and leaving it at death to the charity.  However, this plan would fail if the donor did not live long enough to allow him or her to build up enough savings to fund the gift.  The use of life insurance eliminates this risk.  Through life insurance, the donor can guarantee that the project will be funded, even if he or she does not live long enough to fund the project through the normal means of savings or regular donations.
A donor could achieve the transfer of a large charitable gift at death by simply purchasing and owning a life insurance policy and naming the charity as the beneficiary of the policy.  However, this approach would generate no charitable income tax deduction.  No deduction is allowed in part because the donor could, at any time, change the name of the beneficiary to someone else.  In order to generate a tax deduction, the donor must first donate the policy to the charity.  Once the charity owns the policy, then the donor could continue to fund the premium payments by making gifts to the charity for that purpose.  Although the donor does not retain a legal right to force the charity to use the gifts for premium payments, this is rarely needed as the threat of stopping future giving is usually sufficient to cause the charity to follow the donor’s preferences.  In order for the transfer of the policy (and any subsequent payments of gifts to be used for premium payments) to generate a charitable gift, the donor must give up all rights to the policy as well as any direct or indirect benefits from the policy.
In an alternative arrangement, the donor may gift the policy to the charity (or the charity may create the policy) and then the donor can make premium payments directly to the insurance company.  These direct premium payments are deductible gifts, assuming that the charity owns all rights to the policy.  Some charities and insurance agents may prefer this arrangement as it could allow the insurance company to send premium notices directly to the donor, rather than burdening the fundraising staff with continued requests.  There are, however, some differences in the treatment of premium payments made directly to the life insurance company and those made to charity.
Gifts made directly to the charity for the purpose of funding premium payments are treated as any other gifts made to charity.  The charity will issue receipts for the gifts just as with any other gift.  Assuming that the donor is making cash gifts to a public charity, these are deductible up to 50% of the donor’s adjusted gross income, just as with any other cash gift.  The donor could give cash, but could also give appreciated property, which the charity could then sell in order to generate the cash needed to make premium payments.  Giving appreciated property may provide the added benefit to the donor of avoiding long-term capital gain taxation. 
When the donor makes premium payments directly to the life insurance company, the results may differ slightly.  Some charities will issue receipts for premium payments made directly to a charity owned life insurance policy, but some may not.  Insurance companies will not accept appreciated property for premium payments, so the donor must use cash transfers.  Finally, deductions for such transfers to life insurance companies may be limited to 30% of the donor’s adjusted gross income, even where the policy owner is a public charity.  This is based upon the idea that the cash is not being provide “to” the charity (which results in a 50% income limitation), but instead is being provided “for the use of” the charity (which results in a 30% income limitation).  Some recent cases suggest the possibility of applying the 50% limitation to these transactions as well, but that issue is not currently settled.
Encouraging donors to create and pay premiums on charity owned life insurance policies comes with both potential advantages and potential problems for the charity.  Thus, it does not make sense for charities to either universally accept or universally reject this approach.  Instead, it is useful to consider the specifics of each scenario and the relevant needs of the donor and charity.

One potentially attractive feature of using life insurance is that donors of relatively modest means can fund large posthumous projects.  For example, a healthy 40 year old donor might be able to purchase a $1,000,000 life insurance policy for premium payments of only $1,500 per year for the first 30 years of coverage (with premiums rising thereafter).  Or, the donor could pay $20,000 for only 20 years, with no additional payments due after that point.  Thus, a donor who would never anticipate the ability to make a $1,000,000 gift to the charity could fund that gift by using life insurance.

It is important to note, however, that unless the donor dies earlier than expected, the use of life insurance does not generate a larger gift than would have been possible by simply gifting the premium payment amounts to the charity and allowing them to grow until the death of the donor.  The use of life insurance provides protection only against the early death of a donor who had otherwise intended to save or give enough to fund a large project.  Further, the apparent ability of life insurance to generate a “big” gift may also rely on the natural misperception of future values.  For a typical 40 year old donor, a $1,000,000 gift is a big gift.  But, that donor is likely to live for approximately 40 more years.  If future inflation is similar to the past, then the future $1,000,000 gift received in 40 years will have the same purchasing power as a $190,000 gift today.  Waiting 40 years to receive $190,000 of purchasing power in today’s dollars does not feel quite as impressive as the large $1,000,000 figure.  Additionally, recent evidence suggests that donors with planned posthumous gifts to charity live longer than others (see James, R.  N., III (2013) American Charitable Bequest Demographics), meaning that the charity will have to wait even longer than normal to receive a death benefit from donors.

Some charities like the idea that subsequent gifts occur without ongoing fundraising efforts from the charity.  For example, where the donor is making premium payments directly to the insurance company, the bill may come directly from the insurance company, and the donor may pay this as a matter of course along with other bills.
Because the use of life insurance typically involves the employment of insurance agents, these transactions create a natural sales force interested in proposing these planned giving transactions to clients.  The proposition of having an agent advocating for the charity without the costs associated with hiring a traditional fundraiser may be attractive to charities.  Having such a “free” sales force may be especially interesting to charities with limited resources to hire and train their own fundraising staff.  In an ideal situation, both the charity and agent can benefit from these potentially symbiotic relationships.
There are, of course, potential downsides to the inability of charities to control or manage those who are proposing charitable transactions.  The charity that gives access to its donor base may risk negative reactions from donors, depending upon the characteristics of the selling agent.  The agent may focus primarily on making an immediate sale, whereas the charity may be hoping to foster a long-term relationship.  Further, the agent may have little downside risk in offending those who are not interested in purchasing the product, whereas the charity may suffer long-term financial effects from damaged relationships with supporting donors.
Another potential problem is the risk that donors will cease providing premiums for the insurance policies.  Depending on the type of insurance, keeping the death benefit may require paying premiums for 10, 20, or 30 years or for the rest of the donor’s life.  It is difficult enough to maintain donor giving from one year to the next – the likelihood that a donor will be consistently committed over many decades or a lifetime is even smaller.  For policies that do not reach “paid up” status, there is also a risk of lapse in advancing age.  Often health or cognitive problems arise prior to death and these may increase the risk of financial oversight, such as failing to pay policy premiums.  Further, such conditions also increase the likelihood that other family members may take over financial management.  These other family members may be less likely to have any commitment to the charity.  Taken together, these factors reduce the likelihood that the premium payments will continue indefinitely and, thus, that the charity will ultimately receive any benefit. 
Another risk in using life insurance is that the structure of the policy may, ultimately, provide more benefit to the insurance companies and insurance agents than to the charity.  This is especially true where the risk for later lapse of the policy is high and such lapse would result in the charity receiving no death benefit.  Thus, the donor may be regularly committing funds strictly for charitable purposes, but ultimately providing little or no benefit for charity.  This does not mean that such gifting arrangements are inherently disadvantageous to charity, only that careful examination is appropriate.

An additional potential problem relates to the requirement of insurable interest.  Taking out a life insurance policy requires that the policy owner have an insurable interest in the insured person.  In other words, you cannot take out a life insurance policy on someone just because you think the person will die soon.  Allowing such speculation could even create financial incentives for murder.  Thus, taking out a life insurance policy on another person normally requires some family or business relationship providing a reason for hedging against the personal or financial loss that would occur in the event of the death of the insured.  If a charity takes out a life insurance policy on a major donor, with the goal of protecting against the loss of income that might occur in the event of the death of the donor, then the charity likely has a valid insurable interest.  However, if the person had never been a donor, or perhaps had made only a few $20 gifts and the charity then takes out a $10,000,000 policy on the life of the donor – there may be serious questions about the presence of an insurable interest.  Fortunately, almost all states have settled this matter by legislation.  In these states, charity is granted an explicit insurable interest in any person (or in some cases any donor) who consents to becoming an insured life.  To give you a feel for the specific requirements in your state, below are excerpts from different state statutes related to this topic. (Please check for any changes or other issues with local counsel before engaging in a transaction.)

ALABAMA CODE §27-14-3

Any provision of this section and chapter to the contrary notwithstanding, a charitable organization that meets the requirements of Section 501(c)(3) of the Internal Revenue Code of 1986, as amended, may own or purchase life insurance on an individual who consents to the ownership of purchase of that insurance.

ALASKA STAT. §21.42.020

Notwithstanding the other provisions of this section, a charitable organization may obtain, by procurement, assignment, or otherwise, life or health insurance on an insured who consents to the issuance of the insurance.

ARIZONA REV. STAT. ANN.  §20-1104

A charitable organization as provided in section 43-1201, paragraph 4, which has a policy ownership interest has an insurable interest in the life of each proposed insured who joins with the charitable organization in applying for a life insurance policy naming the charitable organization as owner and irrevocable beneficiary.

ARKANSAS CODE ANN.  §23-79-103

Notwithstanding any other law or regulation to the contrary, any religious, educational, charitable, or benevolent institution, organization, corporation, association, or trust, including, but not limited to, Charitable Remainder Trusts, may be named beneficiary or owner, or both, of the policy or contract by any applicant for insurance upon his or her own life in any policy of life insurance issued by any life insurance company authorized to do business in this state or in the state of domicile of the applicant for insurance.

CALIFORNIA INS.  CODE §10110.1(f)

a charitable organization that meets the requirements of Section 214 or 23701d of the Revenue and Taxation Code may effectuate life or disability insurance on an insured who consents to the issuance of that insurance

COLORADO REV. STAT. §10-7-115

Notwithstanding any other provision of law, any organization that meets the requirements of section 170 (c) of the federal "Internal Revenue Code of 1986", as amended, may own or purchase life insurance on an insured who gives written consent to the ownership or purchase of that insurance.

CONNECTICUT GEN. STAT. §38a-450

Any life insurance company doing business within the state may issue policies of insurance predicated upon the life or lives of any person or persons, payable at maturity to any educational, ecclesiastical, benevolent, charitable or eleemosynary corporation which can legally take and receive testamentary legacies, irrespective of a financial interest on the part of such corporation in the life of the person or persons insured.

DELEWARE CODE ANN.  tit.  18, §2705

Life insurance contracts may be entered into in which the person paying the consideration for the insurance has no insurable interest in the life of the individual insured, where charitable, benevolent, educational or religious institutions, or their agencies, are designated irrevocably as the beneficiaries thereof

D.C. CODE ANN.  §31-4716

A charitable, benevolent, educational, governmental, or religious institution that is described in §501(c)(3) or §170(b)(1)(A) of the Internal Revenue Code or a trust for the benefit of the institution that is qualified as a Charitable Remainder Trust under §664 or a Pooled Income Fund under §642(c)(5) of the Internal Revenue Code may acquire an insurable interest in the life of an individual if: (1) The institution or trust is designated irrevocably as the beneficiary of the insurance proceeds or designated as the owner of the life insurance policy, or both; (2) The application for the insurance contract is procured and signed by the individual whose life is to be insured; and (3) Notwithstanding paragraph (1) of this subsection, the insured pays the premiums for the insurance policy for at least 3 years following the issuance of the policy.

FLORIDA STAT.  §627.404(2)b(7)

A charitable organization meeting the requirements of s.  501(c)(3) of the United States Internal Revenue Code, as amended, has an insurable interest in the life of any person who consents in writing to the organization’s ownership or purchase of that insurance. 

GEORGIA CODE ANN.  §33-24-3(j)

A charitable institution as defined under Sections 501(c)(3), 501(c)(6), 501(c)(8), and 501(c)(9) of the Internal Revenue Code of 1986 shall have an insurable interest in the life of any donor.

HAWAII REV. STAT. §431:10-202(4)

A charitable organization as defined in section 467B-1 has an insurable interest in the life of each proposed insured who joins with said organization in applying for a life insurance policy naming said organization as owner and irrevocable beneficiary. 

IDAHO CODE ANN.  §41-1805

Contracts of life insurance may be made and entered into in which the person paying the consideration for such insurance has no insurable interest in the life of the person insured, where charitable, benevolent, educational, or religious institutions are designated irrevocably as the beneficiaries thereof.

215 ILLINOIS COMP. STAT. §5/245.2

Members of not-for-profit organizations that are exempt from taxation as described in paragraph (3), (4), (5), (9), or (10) of subsection (c) of Section 501 of the Internal Revenue Code or either past or present individual or family donors to a not-for-profit organization may obtain life insurance policies naming the not-for-profit organization as the irrevocable sole beneficiary of the policy.  The not-for-profit organization, as the sole beneficiary of the policy, may continue to pay the premiums to the issuing insurance company where the donor discontinues the premium payments and continuance of the policy is a prudent investment.

INDIANA CODE §§27-8-18-4

A charitable entity that purchases or is transferred ownership of a life insurance policy under subsection (a) has an insurable interest in the life of the individual who consents to the charitable entity's purchase or ownership of the policy.

IOWA CODE §511.39

A charitable organization described in section 501(c)(3) of the Internal Revenue Code, as defined in section 422.3, has an insurable interest in the life of a person who, when purchasing a life insurance policy, makes a donation to the charitable organization or makes the charitable organization the beneficiary of all or a part of the proceeds of the policy or joins with a charitable organization in applying for an insurance policy which when issued will insure that person's life and name the organization as owner or beneficiary of all or any portion of the benefits of the life insurance policy.

KANSAS STAT. ANN.  §40-450(b)

A charitable, benevolent, educational and religious institution qualified under section 501(c) of the internal revenue code shall be deemed to have an insurable interest in the life of an individual insured who has executed a written consent to the assignment of the insurance contract to such institution if such institutional assignee is named as the irrevocable beneficiary thereof. 

KENTUCKY REV. STAT. ANN.  §304.14-050

(1)Life insurance contracts may be entered into in which the person paying the consideration for the insurance has no insurable interest in the life of the individual insured, where charitable, benevolent, educational, or religious institutions, or their agencies, are designated irrevocably as the beneficiaries thereof. 

(2) In making such contracts the person paying the premium shall make and sign the application therefor as owner, and shall designate a charitable, benevolent, educational or religious institution, or an agency thereof, irrevocably as the beneficiary or beneficiaries of such contract.  The application shall be signed also by the individual whose life is to be insured

LOUSIANA REV. STAT. ANN.  §22.902

Notwithstanding any other law or regulation to the contrary, any religious, educational, eleemosynary, charitable, or benevolent institution or undertaking may be named beneficiary in or owner of any policy of life insurance issued by any life insurance company upon the life of any individual.  The beneficiaries or owners named shall have an insurable interest for the full face of the policy and shall be entitled to collect same. 

MAINE REV. STAT. ANN.  tit.  24-A, §2405

1.  Life insurance contracts may be entered into in which the person, trust or trustee paying the consideration for the insurance has no insurable interest in the life of the individual insured, where charitable, benevolent, educational or religious institutions, or their agencies, are designated irrevocably as the beneficiaries thereof.

2.  In making such contracts, the person paying the premium shall make and sign the application therefor as owner or as settlor of a trust, and shall designate a charitable, benevolent, educational or religious institution, or any agency thereof, irrevocably as the beneficiary or beneficiaries of such contract.  The application must be signed also by the individual whose life is to be insured.

MARYLAND CODE ANN., INS.  §12-201(c)

(1) This subsection applies only to a charitable, benevolent, educational, governmental, or religious institution that is described in §170(b)(1)(A) or §501(c)(3) of the Internal Revenue Code, or a trust for the benefit of that institution that is qualified as a Pooled Income Fund under §642(c)(5) or a Charitable Remainder Trust under §664 of the Internal Revenue Code.

(2) An institution or trust described in paragraph (1) of this subsection may procure or cause to be procured an insurance policy on the life of an individual if: (i) the institution or trust is designated irrevocably as the beneficiary of the insurance policy; and (ii) the application for the insurance policy is signed by the individual whose life is to be insured or the individual's legal guardian.

MASSACHUSETTS GEN. LAWS ch.  175, §123A(2)

A charitable institution as defined under section 501 (c)(3), (c)(6), (c)(8), and (c)(9) of the Internal Revenue Code shall be deemed to have an insurable interest, without limitation, in the life of any donor. 

MICHIGAN COMP. LAWS §500.2212

Notwithstanding any other section of this act, an organization described in and qualified under section 501(c)(3) of the internal revenue code of 1986, 26 U.S.C.  501, has an insurable interest in the life of an individual who gives written consent to the ownership or purchase of a policy on his or her life.

MINNESOTA STAT.  §60A.0783(2)f

An organization in section 170(c) of the United States Internal Revenue Code of 1986, as amended through December 31, 2008, has an insurable interest in the life of any person who consents in writing to the organization's ownership or purchase of that insurance.

MISSISSIPPI CODE ANN.  §83-5-251

Any religious, educational, eleemosynary, charitable or benevolent institution or its agency may be named beneficiary in any policy of life insurance issued by any insurance company upon the life of any individual.  A religious, educational, eleemosynary, charitable or benevolent institution or its agency designated as a beneficiary has an insurable interest for the full face of the policy and is entitled to collect the full face of the policy.

MISSOURI REV. STAT. §377.080

A charitable, benevolent, educational or religious institution qualified pursuant to section 501(c)(3) of the federal Internal Revenue Code, as amended, shall be deemed to have an insurable interest in the life of an insured individual if, in the absence of any fraud or coercion: (1) The individual has designated the institution as a beneficiary; (2) The individual has made a gift or an assignment of an interest in life insurance on the life of such insured individual; or (3) The life insurance is owned by such charitable, benevolent, educational or religious institution and such institution has obtained the consent of the person whose life is being insured, as required by section 376.531.

MONTANA CODE ANN.  §33-15-201(5)

A charitable institution has an insurable interest in an individual if: (a) the individual authorizes the charitable institution to purchase insurance naming the charitable institution as an irrevocable beneficiary; and (b) the insurance is purchased with contributions made by the individual. 

NEBRASKA REV. STAT. §44-704(4)

Nothing in Chapter 44 shall prohibit an organization or entity described in section 501(c)(3) of the Internal Revenue Code or to whom a charitable contribution could be made under section 170(c) of the code or a trust all of whose beneficiaries are organizations or entities described in section 501(c)(3) of the code or to whom a charitable contribution could be made under section 170(c) of the code from procuring, effectuating, or causing to be procured or effectuated the ownership of any life insurance policy or annuity contract upon the life of an individual if such individual gives written consent to the issuance of such policy or contract when such organization, entity, or trust is the owner of such policy or contract.  Nothing in Chapter 44 shall require such organization, entity, or trust to have an insurable interest as defined in section 44-103 in the life of such individual in order for a policy or contract to be procured or effectuated pursuant to this subsection. 

NEVADA REV. STAT. §687B.050

  1.  Life insurance contracts may be entered into in which the person paying the consideration for the insurance has no insurable interest in the life of the individual insured, where charitable, benevolent, educational or religious institutions or their agencies are designated irrevocably as the beneficiaries thereof.

  2.  In making such contracts the person paying the premium shall make and sign the application therefor as owner, and shall designate irrevocably a charitable, benevolent, educational or religious institution or an agency thereof as the beneficiary or beneficiaries of such contract.  The application shall be signed also by the individual whose life is to be insured.

NEW HAMPSHIRE REV. STAT. ANN.  §408:2-a

I.  A life insurance policy may be issued with the person paying the premiums for such insurance having no insurable interest in the life of the insured, providing a charitable, benevolent, educational, or religious institution or any other organization which qualifies for a charitable deduction under the Internal Revenue Code is designated irrevocably as the owner and beneficiary of the policy.  II.  A life insurance policy may be issued with the person paying the premiums designated in the application as owner and insuring the premium payer's own life and designating a charitable, benevolent, educational, or religious institution or any other organization which qualifies for a charitable deduction under the Internal Revenue Code as the irrevocable beneficiary of the policy.  III.  Nothing in this section shall affect the right of any person to effectuate life insurance on such person's own life, or by a person or any business entity on another life if there exists any reasonable expectation of pecuniary benefit or advantage, direct or indirect, in the continued life of the other person.  IV.  No life insurance policy may be issued under this section unless the insured has consented in writing to the issuance of such policy.

NEW JERSEY STAT. ANN.  §17B:24-1.1(5)

A nonprofit or charitable entity qualified pursuant to section 501 (c) (3) of the Internal Revenue Code of 1986 (26 U.S.C.  s.501(c)(3)), or a government entity has an insurable interest in the life or physical or mental ability of its directors, officers, employees, supporters or their designees or others to whom it may look for counsel, guidance, fundraising or assistance in the execution of its legally established purpose, who either: (a) join with the entity in signing the application for insurance, which application names the entity as the owner and irrevocable beneficiary of the policy; or (b) after having been listed as owner, subsequently transfer ownership of the insurance to the entity and name the entity as the irrevocable beneficiary of the policy. 

NEW MEXICO STAT. ANN.  §59A-18-5

A.  Life insurance contracts may be entered into in which the person paying the consideration for the insurance has no insurable interest in the life of the individual insured, where charitable, benevolent, educational or religious institutions or their agencies are designated irrevocably as the beneficiaries thereof. 

B.  In making such contracts the person paying the premium shall make and sign the application therefor as owner, and shall designate irrevocably a charitable, benevolent, educational or religious institution or an agency thereof as the beneficiary or beneficiaries of such contract.  The application shall be signed also by the individual whose life is to be insured. 

NEW YORK INS. LAW §3205

(3) Notwithstanding the provisions of paragraphs one and two of this subsection, a Type B charitable, educational or religious corporation formed pursuant to paragraph (b) of section two hundred one of the not-for-profit corporation law, or its agent, may procure or cause to be procured, directly or by assignment or otherwise, a contract of life insurance upon the person of another and may designate itself or cause to have itself designated as the beneficiary of such contract. 

NORTH CAROLINA GEN. STAT. §§58-58-86

If an organization described in section 501(c)(3) of the Internal Revenue Code purchases or receives by assignment, before, on, or after the effective date of this section, life insurance on an insured who consents to the purchase or assignment, the organization is deemed to have an insurable interest in the insured person's life.

NORTH DAKOTA CENT. CODE §26.1-29-09.1(3)d

In the case of religious, educational, eleemosynary, charitable, or benevolent organizations, a lawful interest in the life of the individual insured if that individual has executed a written consent to the insurance contract. 

OHIO REV.  CODE ANN §3911.09

Any religious, charitable, scientific, literary, educational, or other institution or entity that is described in section 170, 501(c)(3), 2055, or 2522 of the "Internal Revenue Code of 1986," 100 Stat.  2085, 26 U.S.C.A.  170 , 501 , 2055 , 2522 , as amended, may be the owner of, or may be designated beneficiary in, any policy of life insurance issued upon the life or lives of one or more individuals.  Any such institution or entity has an insurable interest in the life of each insured and is entitled to enforce all rights and collect all benefits to which it is entitled pursuant to the policy.

OKLA.HOMA STAT. tit.  36, §3604

Life insurance contracts may be entered into in which the person paying the consideration for the insurance has no insurable interest in the life of the individual insured, where charitable, benevolent, educational or religious institutions, or their agencies, are designated as the beneficiaries thereof.  In no event shall an individual be named as a beneficiary.  In making these contracts, the person paying the premium shall make and sign the application therefor as owner and shall designate a charitable, benevolent, educational, or religious institution, or an agency thereof, as the beneficiary or beneficiaries of the contract.  The application or any subsequent change of beneficiary designation shall be signed by the individual whose life is to be insured.  These contracts shall be valid and binding among the parties, notwithstanding the absence otherwise of an insurable interest in the life of the individual insured. 

OREGON REV. STAT. §743.030

Life insurance policies may be effected although the person paying the consideration has no insurable interest in the life of the person insured if a charitable, benevolent, educational or religious institution is designated irrevocably as the beneficiary.

(2) In making such policies the person paying the premium shall make and sign the application therefor as owner.  The application also must be signed by the person whose life is to be insured.  Such a policy shall be valid and binding between and among all of the parties thereto.

PENNSYLVANIA 40 P.S.  §512

A charitable organization that meets the requirements of section 501(c)(3) of the Internal Revenue Code of 1986 (Public Law 99-514, 26 U.S.C.  §501 (c)(3)), as amended, may own or purchase life insurance on an insured who consents to the ownership or purchase of that insurance

Rhode Island - None

SOUTH CAROLINA CODE ANN.  §38-63-100

Notwithstanding any other provision of law, a bona fide charity or nonprofit corporation which is in compliance with the "Solicitation of Charitable Funds Act" (Chapter 55 of Title 33) has an insurable interest in the life of an insured under a policy in which the charity or corporation is irrevocably named as a beneficiary provided that the application for insurance is signed by the insured.

SOUTH DAKOTA CODIFIED LAWS §§58-10-4

Insurable interest in personal insurance defined.  Insurable interest with reference to personal insurance includes only interests as follows:...(4) A charitable organization that meets the requirements of section 501(c)3 of the Internal Revenue Code of 1986, as amended to January 1, 1992, and owns or purchases life insurance on an insured who consents to the ownership or purchase of the insurance has an insurable interest in the life of the insured;

TENNESSEE CODE ANN.  56-7-314;

If an organization described in either §170(c) or §501(c)(3) of the Internal Revenue Code of 1986, codified in 26 U.S.C.  §§170(c) and 501(c)(3), respectively, purchases or receives by assignment, before or after April 23, 1992, life insurance on an insured who consents in writing to the purchase or assignment, the organization is deemed to have or to have had an insurable interest in the insured person's life on the date of purchase or assignment.

TEXAS INS.  CODE ANN.  §1103.005

A religious, educational, eleemosynary, charitable, or benevolent institution or undertaking may be designated as a beneficiary in a policy that insures the life of an individual. 

UTAH CODE ANN.  §31A-21-104(7)

This section does not prevent an organization described under Section 501(c)(3), (e), or (f), Internal Revenue Code, as amended, and the regulations made under this section, and which is regulated under Title 13, Chapter 22, Charitable Solicitations Act, from soliciting and procuring, by assignment or designation as beneficiary, a gift or assignment of an interest in life insurance on the life of the donor or assignor or from enforcing payment of proceeds from that interest.

Vermont - None

VIRGINA CODE ANN.  §38.2-301(4)

In the case of an organization described in §501 (c) of the Internal Revenue Code, the lawful and substantial economic interest required in subdivision 2 of this subsection shall be deemed to exist where (i) the insured or proposed insured has either assigned all or part of his ownership rights in a policy or contract to such an organization or has executed a written consent to the issuance of a policy or contract to such organization and (ii) such organization is named in the policy or contract as owner or as beneficiary.

WASHINGTON REV. CODE ANN.  §48.18.030

(d) Subject to rules adopted under subsection (4) of this section, upon joint application with a nonprofit organization for, or transfer to a nonprofit organization of, an insurance policy on the life of a person naming the organization as owner and beneficiary, a nonprofit organization's interest in the life of a person if:

  (i) The nonprofit organization was established exclusively for religious, charitable, scientific, literary, or educational purposes, or to promote amateur athletic competition, to conduct testing for public safety, or to prevent cruelty to children or animals; and

  (ii) The nonprofit organization: (A) Has existed for a minimum of five years; or (B) Has been issued a certificate of exemption to conduct a Charitable Gift Annuity business under RCW 48.38.010, or is authorized to conduct a Charitable Gift Annuity business under RCW 28B.10.485; or  (C) Has been organized, and at all times has been operated, exclusively for benefit of, to perform the functions of, or to carry out the purposes of one or more nonprofit organizations described in (d)(ii)(A) or (B) of this subsection and is operated, supervised, or controlled by or in connection with one or more of those nonprofit organizations; and

  (iii) For a joint application, the person is not an employee, officer, or director of the organization who receives significant compensation from the organization and who became affiliated with the organization in that capacity less than one year before the joint application.

  (4) The commissioner may adopt rules governing joint applications for, and transfers of, life insurance under subsection (3)(d) of this section.  The rules may include:  (a) Standards for full and fair disclosure that set forth the manner, content, and required disclosure for the sale of life insurance issued under subsection (3)(d) of this section; and (b) For joint applications, a grace period of thirty days during which the insured person may direct the nonprofit organization to return the policy and the insurer to refund any premium paid to the party that, directly or indirectly, paid the premium; and (c) Standards for granting an exemption from the five-year existence requirement of subsection (3)(d)(ii)(A) of this section to a private foundation that files with the insurance commissioner documents, stipulations, and information as the insurance commissioner may require to carry out the purpose of subsection (3)(d) of this section.

WEST VIRGINA CODE §33-6-2(c)4

(c) "Insurable interest" with reference to personal insurance includes only interests as follows:...(4) A charitable institution as defined under Sections 501(c)(3), 501(c)(6), 501(c)(8) and 501(c)(9) of the Internal Revenue Code of 1986, as amended.

WISCONSIN ADMIN. CODE INS.  §2.45

A charitable organization may be the applicant, owner or beneficiary of a life insurance policy issued on the life of any individual.  A charitable organization is deemed to have an insurable interest in the individual.

WYOMING STAT. ANN.  §26-15-103

(a) Contracts of life insurance may be made and entered into in which the person paying the consideration for the insurance has no insurable interest in the life of the person insured, if charitable, benevolent, educational or religious institutions are designated irrevocably as a beneficiary but not necessarily the primary beneficiary thereof.

(b) In making a contract as specified in subsection (a) of this section, the person paying the premium shall make and sign the application therefor as owner and shall designate a charitable, benevolent, educational or religious institution irrevocably as the beneficiary or one (1) of the beneficiaries of the policy.  The application also shall be signed by the person whose life is to be insured.

Even when it works, encouraging donors to make premium payments on life insurance will typically benefit the charity only after many years.  During the intervening time, donors are making cash gifts year after year, but the charity has no resulting gift income to spend.  Depending upon the needs and desires of the charity, this may be a highly undesirable result even if, ultimately, the charity receives substantial gifts.

Another potential downside for the donor is that because the gift occurs only after the donor’s death, the donor will never actually get to see the impact of his or her gift during life.  Ultimately, the charity may be able to build a building, create a scholarship, or achieve any number of important charitable tasks, but the donor will never witness this.  In contrast, if the donor were to take the premium payments and simply give them to the charity as a traditional donation, the impact would occur immediately.  This is an important downside given that life insurance does not make the total gift bigger unless the donor dies earlier than expected.  (If the donor lives to his or her life expectancy, a life insurance policy will not return more than simply investing the premium payment amounts.)

Some charities may take the approach that “something is better than nothing,” meaning that any money raised by life insurance agents through the sale of charity owned life insurance is simply a bonus.  This approach, however, ignores the possibility that the donor may be directing funds to premium payments that otherwise might have gone to the charity as simple donations.  If the premium payments result in cannibalizing the donations that the donor would otherwise have made, then it is important for the charity to carefully weigh the value of using life insurance policies as a means to raise funds.  Although these premium payments may indeed generate something for the charity, it is possible that the charity will also be losing something greater in the process.
How can a charity influence a donor’s decision to use life insurance to benefit the charity?  Ultimately, the charity can refuse to accept the donation of a life insurance policy.  If the charity does not accept ownership of the policy, then the donor cannot deduct premium payments as gifts to the charity.  Given the potential for premium payments to cannibalize regular giving, it may be wise for a charity to establish guidelines for the types of newly-created insurance policies that it will accept.  (Of course, transfers of long-term life insurance policies that have built up substantial cash surrender value are a different matter as discussed in the previous section.)  These requirements can include accepting only policies that will reach paid-up status in a relatively short time.  Paid-up status is the point at which no additional premium payments are necessary in order to keep the death benefit in force for the remainder of the insured’s life (or up to, e.g., age 100).  This paid-up status may depend upon the projected returns of underlying assets and the stability of the issuing company.  Thus, these companies should be highly rated and the return projections should be reasonable to make sure that once a policy reaches paid up status the charity will, ultimately, receive the death benefit.  Reaching paid-up status in a relatively short time (e.g., 10 years) is important for two reasons.  First, it reduces the likelihood that the policy will lapse due to non-payment of premiums by the donor, resulting in no gift to the charity.  Second, it provides a planned break in the premium obligation to allow for shifting the donor into an alternative campaign or gifting approach at that time. 
It may be counter-intuitive and even uncomfortable for a nonprofit organization to refuse a gift, especially one desired by the donor and the donor’s insurance agent.  But, the potential for the charity to receive nothing despite the donor’s many contributions may suggest this unusual approach in cases where the policy does not meet the charity’s guidelines.  If the donor’s regular gifting will be less because of the premium payments he or she is making on the charity owned life insurance policy, the charity should consider making a special effort to understand the value of the proposed insurance policy prior to accepting the gift. 
Financial advisors and fundraisers can often help donors accomplish their charitable goals using life insurance in a variety of different ways.  Life insurance can serve as tax-free wealth replacement for charitable estate gifts transferred to charity.  Older life insurance policies may have built up significant value over time, making them potentially attractive as charitable gifts.  New life insurance policies owned by a charity, with proper planning, can also be a beneficial strategy.  Although the rules can be complex and the techniques may be appropriate only for certain circumstances, when life insurance is needed, it is important for advisors and fundraisers to be ready to suggest these potentially attractive solutions.

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