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

If an annuity is purchased, the annual annuity income is used to pay the annual premium on the life insurance policy. This structure is financially beneficial to the charity as long as:

• the annual annuity payments are sufficient to pay the annual life insurance premium; and

• the death benefit from the life insurance policy exceeds the amount of the initial single premium for the annuity and the other costs not covered by the annuity payments, such as the first premium payment on the life insurance policy.

If there is borrowing on the charitable organization’s behalf, the policy serves as collateral for the loan. The individuals who agree to be insured do not provide funds toward the purchase of the policy, nor do they receive charitable deductions for their participation. Their only contribution is their insurability. The advantage for them is knowing that an organization they care about will benefit.