Life insurance can turn relatively modest annual commitments into a substantial future bequest. A single policy can create future funding for programs, endowments, or capital projects at a scale that might be difficult to achieve with cash alone.
Permanent policies such as indexed universal life (IUL) combine a death benefit with the potential to build cash value through index-linked growth that the policy owner can access through withdrawals or policy loans. Some donors explore using policy loans as a way to create charitable gifts during life, while still preserving long‑term protection, especially due to potentially preferential tax treatments of these arrangements.
When an individual donor owns the IUL, policy loans are typically treated as advances against the policy rather than taxable income and are therefore considered "tax-free", provided the contract stays in force and does not become a modified endowment contract. The donor can then use those funds to make cash gifts and may be eligible for a charitable income‑tax deduction for those cash contributions, subject to standard percentage and substantiation rules.
When the charity owns the IUL and uses policy loans, the analysis becomes more complex. While most charities are tax‑exempt, certain investment‑related activities can trigger unrelated business taxable income (UBTI), and boards must weigh risk, cost, and clarity of purpose before relying on loans as an ongoing funding source - they can still, of course, rely on the value of the death benefit as a beneficiary.
In practice, the most straightforward and mission‑aligned approaches tend to be:
Annuities can also be powerful tools for donors who want predictable income and a reliable way to support their favorite organizations. As this topic can be complex, it helps to distinguish between charitable gift annuities (CGAs) and commercial annuities used in a charitable context.
A CGA is a simple contract between a donor and a charity: the donor makes an irrevocable gift, and in return the charity promises fixed payments to one or two people for life. This ensures long-term income for the donor, and long-term benefits to the charity who will receive the residual value of the CGA upon the donor passing.
Donors typically receive a partial income‑tax deduction in the year of the gift, based on the portion expected to remain for the charity, along with predictable lifetime income that may be tax‑favored for a period depending on the asset used to fund the gift (e.g. a "Qualified" asset like an IRA or 401k; or a "Non-Qualified" asset like a cash lump sum from an inheritance).
For non-profits, CGAs can provide investable assets and a predictable long‑term funding stream, but they also require careful reserve management, regulatory compliance, and adherence to recommended standards such as those published by the American Council on Gift Annuities.
Naming a charity as beneficiary of a non-qualified commercial annuity can be very tax‑efficient, because gain that would be taxable to an individual can often be received by a qualified charity without income tax.
A charity may also own a commercial annuity as a stable investment; earnings are typically tax‑exempt, though unrelated business income rules can apply in certain situations, particularly where leverage or unrelated activities are involved. This scenario requires Boards and Development Teams to have clear advice for possible implications under Unrelated Business Taxable Income or UBTI rules.
One scenario worth a special mention related to donors age 70½ and older, who can in some cases use partial distributions from IRAs to fund a CGA using "Qualified Charitable Distributions" or QCDs. The structure, while limited to a select groups of donors can provide significant benefits to both the donor and charity: it allows donors to support a mission, avoid including the distribution in taxable income, and receive lifetime payments, while benefiting the charity in the same way as any other CGA.
As with any planning strategy that blends personal finance and philanthropy, the “how” matters as much as the “what.” Thoughtful process builds trust and protects everyone involved.
Key safeguards include:
Conversations about life insurance and annuities should start with the donor’s goals, family needs, and existing planning, not with a product. Donors should never feel pressured to purchase or donate a policy or contract as a condition of support.
Written materials should clearly explain that charitable gift annuities are obligations of the issuing charity, not bank deposits or commercial insurance products, and that gifts of policies or annuity contracts are generally irrevocable. Clear expectations help avoid misunderstandings later.
The most effective and ethical results arise when the non-profit’s development staff and insurance or financial professionals collaborate openly the donor’s tax and legal advisors, with the donor’s interests at the center.