Do you have a favorite charity to which you donate on a regular basis? Do you find it difficult at times to meet your commitment?

The life insurance industry has an answer to your problem that is highly effective, relatively painless, advantageous come tax time and, so long as you’re in good health, readily available. What’s more, it enables you to give more to your charity than you otherwise might afford, and it’s flexible enough to work just as well for folks who want to keep things simple as it does for those who use complicated tax and estate planning strategies to keep the tax man away.

What can do all these things? Life insurance.

People usually buy life insurance to meet family needs. Young couples starting families buy life insurance for protection against financial loss if one of them dies. The parents of children with special needs – for example, disabled children who will need a lifetime of medical care – buy life insurance to guarantee that the child will get that care after the parents die.

But you can buy life insurance to meet your commitment to support a favorite charity, too, by naming as beneficiary of the policy your church or synagogue, for example, or your alma mater, or your local YMCA or YWCA, or big organizations such as the red Cross or the Salvation Army. To be sure, your charity won’t get anything until you die, but the upside is that the charity will probably end up with far more money than you could come up with on your own if, instead of sending checks every month to the insurance company to pay premiums, you dropped the same sums in the collection box.

That’s the simplest way to use life insurance in a program of charitable giving – buying the coverage and naming your charity as beneficiary.

Simplicity has its price, however. The premiums you pay are not deductible against your income, so you end up benefitting your charity but not doing much for yourself.

There are other, more complicated ways of doing good things for your favorite charity and at the same time gaining some leverage against the tax man. For example, rather than buy the policy yourself, the charity could purchase the coverage, name itself owner and beneficiary of the policy and use donations from you to pay the premiums. The advantage to you in such an arrangement is that your donations get you a deduction against income. You also keep proceeds from the policy out of your estate. This is important because, although estate tax law right now generally shields insurance proceeds from taxation so long as the money goes to a charitable organization, certain restrictions apply, and in any case, you can have no guarantee that the laws won’t change over time, possibly subjecting life insurance proceeds to taxation even though your intention is that they flow through to the charity.

A less complicated strategy is to buy dividend-paying insurance, name your family members as beneficiaries, and assign the dividends to your charity. The advantages here are that:

  • You get a deduction against income equal to the amount of the dividends going to your charity,
  • Your family gets the death benefit, and
  • You retain ownership rights in the policy enabling you to assign the dividends to some other charity should you and the original charity part ways.

For that matter, so long as you remain owner of the policy, you can change beneficiaries, too, so if one or another of your family members gives you some grief, you can – well, you can follow the example of those vindictive English aunts in cheap Victorian novels who disinherit slovenly wastrel nephews.

There’s yet another way to benefit your favorite charity with life insurance – donate an existing policy to the charity. Remember, though, that because your policy qualifies as property under the law, you have to follow certain procedures to get the job done right. You must, for example, actually deliver the policy into the possession of the charity, and you must assign all rights in the policy to the charity, making it the owner of the policy as well as its beneficiary and giving it sole control over the policy’s cash value, if any. Above all, you must make sure that you retain no “incidents of ownership” – insurance jargon – in the policy, lest you lose the right to deduct the premiums against income.

If you think this means you’ll need to get your lawyer on the phone to do this deal right, you’re probably right. The “incidents of ownership” are many and complicated when it comes to life insurance, and you don’t want to make a mistake.

While you have your lawyer on the phone, ask about “gifts for the use of a charity” as distinct from “gifts to a charity.” Under certain circumstances the federal government will deem premium payments you make directly to the insurer as “gifts for the use of the charity,” as distinct from “gifts to the charity” – a distinction clear to smart lawyers and, of course, government bureaucrats, but not to ordinary mortals.

If your lawyer knows tax law, he or she will tell you that “gifts to a charity” are fully deductible against income and “gifts for the use of the charity” are not, and if you intend to make the premium payments yourself, you might end up losing money. How much? Premium payments deemed “gifts for the use of the charity” are deductible only at 50 percent.

The solution, of course, is to make donations equal to your premiums directly to the charity and let it cut checks for the premiums to the insurer.

One more thing before your lawyer rings off. The donation of a life insurance policy to a charity should qualify you to take a deduction against income equal either to the “fair market value” of the policy or to your “adjusted cost basis.”

If your lawyer is really smart, he or she will know what this gobbledygook means. If not, call your accountant in hopes that he or she’s smarter, and if that doesn’t work, call the smart folks at the IRS. They know tax law, right? And we know about the good advice they give to confused taxpayers who call in, right? End of story.