Exploring Planned Giving: The Rise Of Life Insurance As A Charitable Tool

Created By: Steve Orr and Lindsy Hannan
September 27, 2024

In recent years, the landscape of planned giving has evolved significantly in the United States, demonstrating remarkable growth and adaptation. Recent statistics show planned giving commitments rose by 2.3% from 2021 to 2022, reaching a staggering $46 billion. Furthermore, donor-advised funds (DAFs) saw a remarkable 9% increase in giving, with over $85 billion deposited in 2022 alone. As we look to the future, it’s essential to understand the key factors driving this growth and the unique opportunities that life insurance presents as a planned giving vehicle for donors and nonprofits.

Recent Growth Trends in Planned Giving

Estimates suggest that upwards of $84 trillion will be passed from Baby Boomers to younger generations over the next several decades. This wealth is being transferred through inheritance, estate planning, and charitable donations in the form of planned gifts. In conjunction with the Great Wealth Transfer, the recent uptick in planned giving has largely been driven by tax incentives, financial engineering, and technology. 

Key Factors Influencing Growth in Planned Giving

1. Tax Incentives

Planned giving allows donors to contribute to causes they care about while simultaneously receiving notable tax benefits and gaining financially. Many individuals seek to reduce the taxable value of their estates through charitable bequests, which are deductible from estate taxes. By making large donations to charities, donors can reduce their taxable estate below the exemption level, thus avoiding or minimizing estate tax liabilities.

Additionally, gifts to qualified charitable organizations may not only reduce the size of the taxable estate but can also provide lifetime income tax deductions. Tools such as Charitable Remainder Trusts (CRTs) or Charitable Lead Trusts (CLTs) allow individuals to contribute to charities while still retaining income benefits or wealth transfer options.

2. Financial Engineering

Financial engineering has played a transformative role in creating innovative charitable giving solutions within the insurance, banking, and finance industries. By using sophisticated financial instruments, modeling, and risk management techniques, these industries can offer products and strategies that encourage charitable giving while maximizing both tax efficiency and financial return.

The growth of DAFs as a banking solution for charitable giving is particularly noteworthy. These funds allow donors to make a charitable contribution, receive an immediate tax deduction, and then decide later how to distribute funds. The appeal of DAFs is their flexibility and the potential for strategic philanthropy. As the younger demographic becomes more financially savvy and socially conscious, the interest in these giving mechanisms continues to grow.

In addition, charitable life insurance and premium-financed charitable life insurance are two notable insurance products for charitable giving. Individuals use life insurance policies to benefit charities. In a common arrangement, the policyholder names a charity as the beneficiary, and the charity receives the policy’s death benefit upon the policyholder’s death. Financial engineers can structure these policies to provide significant tax benefits while maximizing the charitable gift.

3. Technology and Accessibility

Advancements in technology have played a crucial role in the growth of planned giving. Donors now have unprecedented access to information about various giving strategies. Online platforms and tools enable donors to calculate potential tax benefits and understand the long-term impact of their contributions. Additionally, banks and financial institutions can use blockchain technology to create transparent, traceable charitable giving platforms while financial engineers can design smart contracts that automatically disburse funds to charities when certain conditions are met, reducing administrative costs and fraud risks. Lastly, financial institutions can develop robo-advisors for charitable giving, using algorithms to recommend the most tax-efficient and impactful ways for individuals to donate based on their financial goals and values.

The Rise of Life Insurance as a Planned Giving Tool

Life insurance is gaining recognition as a powerful tool for planned giving. It allows donors to make significant contributions without impacting their current financial situation. By naming a charity as a beneficiary, donors can leverage their life insurance policy to make a more substantial gift than they might be able to afford during their lifetime.

Spotlight: Premium Financed Life Insurance

One of the most intriguing options within the realm of life insurance for planned giving is premium-financed life insurance. This strategy allows high-net-worth donors, $5M-$10M+, to maximize their philanthropic impact without depleting their cash reserves. An ideal candidate for this type of giving often has a need for liquidity, a strong credit profile, a requisite for a large death benefit, a long-term investment outlook, comfort with leverage, and a diversified investment portfolio.

How It Works

With premium-financed life insurance, donors can take out a loan to pay the premiums on a life insurance policy. This can be particularly advantageous in today’s declining interest rate environment, where borrowing costs are lower, making it easier for donors to sustain their policies without tying up substantial cash. Lower interest rates also lead to arbitrage opportunities for policyholders in the form of cash value growth. With interest rates on loans declining but returns on the cash value of the policy remaining stable or relatively higher, the policyholder effectively earns a return on the life insurance policy greater than the cost of borrowing.

Benefits

1. Increased Giving Capacity: Donors can fund larger policies, leading to a more significant impact on their chosen charities.
2. Liquidity Preservation: Since the premiums are financed rather than paid out of pocket, donors retain their liquidity for other investments or needs.
3. Tax Advantages: Death benefits from life insurance are generally tax-free, allowing the entire amount to go directly to the designated charity.

Considerations

While there are substantial benefits, it is also important to consider the potential downsides. In a low-interest environment, cash value growth may slow down, which can increase the risk of policy lapse if the borrowed amounts exceed the cash value. It’s crucial for donors to work closely with their financial advisor to ensure that their insurance policy remains properly funded and to fully understand the risks and rewards of this strategy.

Conclusions

As planned giving continues to grow, particularly with innovative vehicles like life insurance, it presents an exciting opportunity for both charities and donors. The current financial landscape, marked by declining interest rates, creates an opportune moment for organizations to educate their donors about the benefits of utilizing life insurance for charitable giving.

By understanding the trends, embracing technology, and recognizing the needs of younger donors, organizations can effectively communicate the value of planned giving strategies. Life insurance, particularly when paired with premium financing, stands out as a powerful tool for those looking to leave a lasting legacy while supporting the causes they are passionate about.

For organizations looking to tap into this growing trend, now is the time to engage in meaningful conversations with potential donors about how life insurance can amplify their philanthropic impact. The future of planned giving is bright, and with the right strategies, both charities and donors can achieve remarkable outcomes.

Wherever you are in your planned giving journey, Orr Group has the expertise to support you in planned giving strategy, management, and administration. Get in touch to learn more. 

Steve Orr is the Co-Founder and Managing Partner of Orr Group. Steve draws from his investment banking and finance background to bring a problem-solving approach, a focus on metrics, and an outcomes-driven perspective to the nonprofit sector.

Lindsy Hannan is a Director at Orr Group. She brings over ten years of fundraising experience with a strong focus on corporate giving, donor relations, pipeline development, event fundraising, and board management.