On the Record: Taking Out Life Insurance on Your Donors: A Gamble?

Such plans need to be carefully evaluated by charities because they raise a significant number of tax issues. This column serves as a brief outline of the plan and the issues that should be considered by a charitable organization before going forward.

The way it works
Basically, a charity asks a pool of individuals to agree to permit an insurance policy to be purchased on their lives. The individual, in effect, donates his “insurability” to charity. The funds needed by the charity to pay the annual insurance premiums can be provided in a number of ways. The payments can be borrowed from the insurance company, affiliate or an investor pool expressly established for this purpose — or provided via the charity’s purchase of a single premium annuity on the individual.