Unlock Value in Existing Life Insurance: 3 Questions to Ask Your Clients

By: Jon B. Mendelsohn | Co-Founder + CEO of Ashar Group

For many years, life insurance has been a powerful tool for charitable giving because it can provide significant tax benefits while maximizing the impact for a beloved cause. In other words, it can help clients create lasting legacies.

For new policies, charitable estate advisors assess both a client's situation and philanthropic goals to recommend structures. These can range from premium-financed policies that maximize impact without depleting cash reserves, to charitable giving riders that pay a percentage of the death benefit to a qualified charity of choice.

Existing life insurance policies can also play a powerful role in a client’s charitable giving goals.

To determine the right path, here are three questions to ask your charitable clients who have existing life insurance policies.

Question 1: Does the original purpose of the policy still exist?

Aside from policies purchased specifically for charitable giving, consumers purchase policies for many reasons that may change over time, diminishing the need for coverage.

Given the same financial requirements, would the client purchase the same policy today? Some reasons a life insurance policy may no longer be needed are:

• It was purchased for family protection, and the beneficiaries are self-sufficient
• If the permanent federal estate tax exemptions under OBBBA (One Big Beautiful Bill Act) decrease the policyholder’s estate tax exposure
• If it is a corporate-owned or keyperson policy and the company is sold, or the executive is retiring

In any case, policy owners may choose to donate unneeded policies to charitable organizations to support causes they care about. But using life insurance to fulfill charitable giving goals can pose challenges for both your client and their chosen charity.

Complexities of Life Insurance Donations

Sometimes a policy becomes a financial burden rather than a gift. The primary challenge with transferring policy ownership or naming a charity as the beneficiary is the continued premium obligation for the insured's life expectancy, which is an undetermined period. Regardless of the responsible party, policy performance and rising premiums can make the policy impossible to maintain. Without a clear strategy, clients or charities may lapse or surrender valuable assets for minimal cash value.

Whether the client is living longer than expected, can no longer afford the premiums, or chooses to change the beneficiary designation, a decline in client support can pose a significant challenge to charities that depend on donations involving life insurance.

Reminder: In addition to itemizing income tax deductions, to receive a charitable tax deduction for life insurance donations greater than $5,000, a qualified appraisal from a qualified appraiser is required to provide value for IRS Form 8283 filed with taxes for the tax year the life insurance gift is made.

Question 2: Does the client wish to maximize the charitable impact today, or maintain a legacy benefit for the future?

Aside from the long-term variables that could prevent a life insurance donation from fully materializing, donating a policy or naming the charity as a beneficiary also means the gift is not realized until the insured passes away. For most charities, cash is the most valuable form of support because it provides certainty and impact today.

Case Study: A Living Legacy

Edna, a family matriarch, donated a $350,000 Universal Life policy at age 75. At the time, the cash value was expected to carry the policy to maturity, so neither party would have to make a premium payment. However, Edna was living well beyond her financial plan, and the policy was running out of cash. Now, at 91, she was unable to pay the premium required to keep the policy in force. Instead of surrendering the policy for the minimal $4,500 in cash value, the charity and Edna agreed to an alternative that provided the charity with $140,000 and allowed her to see the donation put to work while still living.

Question 3: Do you know the fair market value of your life insurance policy?

Policies with a death benefit of $100,000 or more on insureds age 65 or older may have fair market value that far exceeds the cash surrender value.

A life settlement is the sale of an existing life insurance policy for more than the cash value and less than the death benefit. In Edna’s case above, an independent sell-side life settlement broker facilitated a competitive policy auction that generated 20 bids from multiple institutional buyers, resulting in $140,000 that the charity could use for current needs.

If the policy qualifies for a buyout, there are several potential advantages of choosing this path over donating the policy itself.

• Eliminate Premium Obligations: Once a policy is sold, the purchaser pays all future premium payments if they intend to keep the policy in force.
• Boost Contributions from Fully Allocated Clients: Some clients face liquidity constraints that prevent them from meeting their philanthropic goals. By monetizing a life insurance policy, charitable clients may be able to give more than they ever thought possible.
• Flexible Use of Funds: The funds from a life settlement can be used for anything. The client can choose to donate all the proceeds or allocate a portion to support retirement, investment, estate, or business planning needs.

Case Study: Client with Limited Cash Flow

By monetizing a $3 million Universal Life policy Cecilia no longer needed through a life settlement, Cecilia (age 85) was able to exceed her charitable giving goals even though her resources were tied up in other financial commitments. She received $1.1 million (almost 23 times the cash surrender value of $48,000) and was honored at the charity’s annual gala for her significant contribution.

Advancing the Mission

Proactively evaluating policy purpose, client objectives, and fair market value can unlock opportunities that deliver immediate benefits and help non-profits advance their missions. For clients, this can be a practical solution for unneeded life insurance with burdensome premium obligations.

While charitable life settlements aren’t necessarily a replacement for traditional charitable estate planning strategies, they can maximize the value of existing life insurance policies and allow clients to create a lasting impact with assets that might otherwise go unused.

Disclaimer: Consult a tax advisor to discuss the tax implications of the various ways to use life insurance as a charitable donation and selling the policy as a life settlement. An independent life settlement sell-side advisor can help determine the fair market value of a life insurance policy.

Ashar Group is a nationally licensed sell-side life settlement firm that protects policy owners’ best interests by facilitating a competitive policy auction to deliver the best value to sellers. Ashar Group does not sell life insurance, manage assets, or purchase policies. It is an independent resource for fiduciary advisors and their clients, specializing in life insurance valuation for planning purposes.

About the Author

Jon B. Mendelsohn
Co-Founder + CEO of Ashar Group