One of the many ways a charity or not-for-profit can derive a large future benefit from their constituency is through the ownership of life insurance on the life or lives of their donors and supporters.
This ownership can come about with the donation of an existing policy by a donor or by the purchase of a new policy.
Effectively, it’s possible for a charity or not for profit to use a portion of the gift a supporter provides and purchase a life insurance policy of the live of the donor, with the consent of the donor.
When, as and if a donor or donors pledge to make systematic donations to the charity or not for profit, these promised payments can then be used to pay the periodic premiums due on the policy(s). It’s also possible for the insured to pay the premium directly to the insurance company.
In some cases, larger charities or not for profits might consider purchasing policies on a large number of donors thereby increasing the probability that a death benefit will be paid over a shorter period of time.
Generally, the premiums must be paid for the policy to remain in force.
Cost for policy issuance is a function of the age(s) of the insured, their health condition, their smoking habits, the amount of life insurance coverage, and the payment period wanted.
All life insurance policies have a named owner, a named insured and named beneficiaries designations. These three different designations can be the same, but in many situations they are not necessarily set up with the same designations.
However, with respect to charity owned life insurance the charity needs 100% ownership and needs to be a 100% beneficiary for this to be efficacious.
Life insurance policies are state specific.
Someone, a company, a charity or a not for profit organization can be the owner of these life insurance policies on someone else's life only when he/she or a charity/company/organization has an "insurable interest" and not all states consider charities or not for profits to have an “insurable interest”.
Most life policies are issued only after a medical questionnaire and in some cases only after medical tests.
Effectively, once a life insurance policy is issued by the insurance company that policy is guaranteed without a new physical, no matter the health condition of the insured, as long as the owner pays the premiums on time.
The death benefit payable to a beneficiary upon the death of the insured is dependent on the claims paying ability of the issuing life insurance company.
It’s always wise for individuals, charities and not-for-profit organizations thinking of involving themselves in these types of programs to check with their legal counsel and tax counsel regarding the treatment of payments.
