Contents

GIFTS OF AND USING LIFE INSURANCEincurring a loan. This method also reduces the death benefit, but it cannot bepaid back without satisfying certain requirements. Third, one can surrender thepolicy (terminate the insurance) and take all of the cash value. The money availablein all three methods may, however, be reduced by a surrender charge, illustratedby the second spigot. In the first 10 to 15 years, the insurance companyimposes this charge on a sliding scale and it reduces to zero by the tenth to fifteenthpolicy year.Universal life offers additional flexibility in that it allows one to select eitherof two death benefit options: a level death benefit or an increasing death benefit.Two other types of insurance contracts have evolved. One is called survivorshipwhole life. It is unique in that it simultaneously insures two or more lives.The second type is group-term life insurance provided by an employer to anemployee. An employee may be provided up to $50,000 of this type of insurancewithout having to recognize taxable income. 4 The cost of any coverage over thatamount provided by the employer must be recognized as income.(c) ValuationThere are three ways in which a life insurance policy can be valued:1. The replacement value, which is the amount the issuer of the insurancewould charge to issue an identical policy to a person of the same age asthe insured. This value is usually used in the gift and estate context. 52. The cash surrender value, which is the amount the insurance company iswilling to pay if the policy is surrendered. This value has been applied inthe income tax context. 63. The potential net death benefit amount, which is the amount the beneficiarywould receive if the insured died immediately; this would be thedifference between the face amount and any loan(s) outstanding.Because the potential net death benefit value is relevant only when special circumstancessuggest that, because of ill health, the insured’s death is imminent,the values usually used are the replacement value and the cash value (or anintermediate amount).§ 17.3 CHARITABLE GIVING AND INSURANCEEssentially, there are three situations in which a contribution of life insurancecan give rise to a charitable deduction.In the first situation, an individual may have an existing whole life insurancepolicy that is fully paid up, or is a single-premium policy, and is not neededfor the protection of his or her family. A gift of the policy to a charitable organizationwould, in general, occasion a charitable deduction in an amount equal tothe replacement value of the policy, as noted. 7 A gift of a single-premium whole4 IRC § 79(a).5 Reg. §§ 25.2512-6(a), Example (3); 20.2031-8, Example (2).6 For example, see §17.3, text accompanied by note 9.7 This statement assumes that there is an insurable interest between the donor and the donee. See § 17.4. 530