Life insurance has traditionally been used as a deferred gift for the benefit of charity or as a wealth-replacement strategy for other assets that may have been gifted to a charity. But what if the charity is in the midst of a capital or endowment campaign and needs current dollars? What if it owns life insurance contracts on some of its donors and would like to turn a future asset into a current asset? Or, what if a donor does not choose to make a gift of securities or other assets he/she might own, but has excess life insurance that was purchased for a need that no longer exists? Could that life insurance policy be used to generate a substantial current benefit for charity and, perhaps, a deferred benefit as well?
The concept of a life settlement is not new. Simply put, it is the sale of an “in-force” life insurance policy by the policy’s legal owner to a third party when the insured is not deemed to have a terminal illness. In most cases, to qualify for a life settlement offer, the named insured must be at least 65 years old. Other criteria, such as age above 65, health condition, and premium structure, are factors that will determine the amount that a company will offer. Because this is not a surrender of the policy for its cash value to the insurance company that issued the policy, it does not matter whether there is any cash value at all in the contract. If an offer is made on a particular policy that has a cash surrender value, the offer usually far exceeds the cash accrued in the policy.