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You want to make a major gift to a cause you believe in, but your wealth is actively working for you in your company or real estate portfolio. Liquidating assets to make a large donation isn't always the right move. What if you could make a six or seven-figure gift without disrupting your current investments? That's the core idea behind charity owned life insurance (CHOLI). This strategy allows you to fund a substantial future donation through smaller, manageable contributions over time. It’s a practical way to achieve your philanthropic goals, turning a standard financial product into a powerful engine for good that aligns with your long-term financial plan.
Charity Owned Life Insurance, or CHOLI, is a strategic way to make a significant financial gift to a nonprofit organization you care about. Think of it as a tool that allows you to multiply your donation, creating a much larger impact than you might be able to with a direct cash gift. In simple terms, the charity becomes the owner and beneficiary of a life insurance policy taken out on you, the donor. When you pass away, the organization receives the death benefit, often completely tax-free.
This method of giving is powerful because it leverages the structure of a life insurance policy to create a substantial future gift from smaller, manageable contributions made today. It’s a forward-thinking approach to philanthropy that aligns perfectly with long-term financial and estate planning. For entrepreneurs and investors who want to leave a lasting legacy, CHOLI provides a clear and efficient path to support the causes that matter most to them for years to come. It transforms a standard financial product into a powerful engine for good.
The foundation of a CHOLI strategy is typically a permanent life insurance policy, like whole life or universal life. These policies are ideal because they not only provide a death benefit but also accumulate cash value over time, creating a stable asset for the charity. There are two primary ways to set this up. First, you can donate an existing life insurance policy that you no longer need, transferring ownership directly to the nonprofit. Alternatively, the charity can purchase a new policy on your life, with your full consent and participation. In both scenarios, the charity is in the driver's seat as the policy owner, ensuring the gift is secure.
A CHOLI arrangement involves a partnership between you (the donor) and the charity. As the donor, your role is to be the insured person and, typically, the one who provides the funds for the policy's premiums. You make annual tax-deductible contributions to the charity, and the charity then uses that money to pay the premiums. The charity’s role is to be the policy owner and sole beneficiary. This means they manage the policy and are the only ones who will receive the death benefit when you pass away. This structure creates a win-win: you get to support your cause and receive a tax deduction, while the charity receives a significant, tax-free payout in the future.
Getting started with CHOLI involves a few clear steps. The most common path is for a donor to work with a charity to purchase a new policy. Another option is to transfer ownership of an existing policy you already have. A simpler, though less structured, alternative is to keep ownership of your policy but name the charity as a beneficiary. While this is a great way to give, true CHOLI involves the charity owning the policy. It's important to know that state laws on "insurable interest" can vary, which means you’ll need to confirm the charity is legally eligible to own a policy on your life. This is why working with financial and legal professionals is a critical step in the process.
Using Charity Owned Life Insurance is a strategic way to align your financial goals with your personal values. It’s a powerful tool that allows you to make a significant impact on a cause you care about while also receiving some compelling financial advantages. For many entrepreneurs and investors, CHOLI isn't just about giving back; it's about giving smarter. It creates a win-win scenario where you can support a charity in a big way, often with a larger gift than you could make with cash, and do so in a way that fits neatly into your overall financial plan. Let's break down the key benefits for both you and your chosen organization.
One of the most immediate advantages of CHOLI is its tax efficiency. When you set up a policy where a charity is the owner and beneficiary, your premium payments can become tax-deductible charitable contributions. This allows you to reduce your taxable income each year you contribute. It’s a structured way to give that provides a financial return for your generosity. This approach allows you to plan for a substantial future gift without liquidating other assets. By leveraging a life insurance policy, you can make a much larger contribution than you might have thought possible, all while optimizing your tax strategy.
CHOLI empowers you to leave a significant legacy. The death benefit from a life insurance policy is often far greater than the sum of the premiums paid into it. This means your favorite charity receives a substantial, tax-free lump sum that can fund their mission for years to come. This is an excellent way to make a major gift without needing a large amount of cash on hand today. For business owners and investors whose capital is actively working for them, CHOLI provides a path to impactful philanthropy that doesn't disrupt their current financial activities. It’s a clear expression of intentional living, ensuring your wealth continues to support what matters most to you.
From an estate planning perspective, CHOLI offers a streamlined way to handle your charitable intentions. When you transfer ownership of a life insurance policy to a charity, you remove that asset from your taxable estate (provided you live for at least three years after the transfer). This can reduce the estate taxes your heirs might otherwise face, preserving more of your wealth for them. It’s a clean and effective method for charitable giving that operates outside of the complexities of probate. This simple transfer ensures your gift goes directly to the charity without delay, making your estate plan more efficient and your final wishes clear.
Selecting the right type of life insurance is the most critical decision in a CHOLI strategy. The policy you choose determines the size and timing of the gift, the tax implications for you, and the financial flexibility for the charity. It’s not a one-size-fits-all situation; the best choice depends on your financial picture and what you want to accomplish with your donation.
Permanent life insurance policies, like whole life and universal life, are typically the go-to options for CHOLI because they last for your entire life and build cash value. This cash value component creates an accessible pool of capital the charity can use while you're still living, making it a dynamic gift. Term life insurance can also play a role in specific situations, but it functions very differently. Let’s look at the three main options so you can see how each one works and decide which aligns best with your philanthropic goals.
Whole life insurance is often the preferred vehicle for CHOLI because it’s built for stability and long-term growth. As a type of permanent life insurance, it provides a death benefit and accumulates cash value over time. This structure offers a powerful two-part benefit for the charity: a significant lump-sum payment in the future and a growing asset they can borrow against for immediate needs.
Think of it as giving the charity an asset that works for them from day one. The cash value provides financial flexibility and a stable foundation for the organization's future, allowing them to plan with more confidence. For donors who want to provide a lasting, predictable gift that supports an organization for years to come, a whole life policy is a solid and reliable choice.
Universal life insurance introduces a layer of flexibility that can be very attractive for CHOLI arrangements. Like whole life, it’s a permanent policy with a death benefit and a cash value component. The key difference is that universal life allows the policy owner to adjust the premium payments and the death benefit amount.
This adaptability can be a major advantage. If you, as the donor, plan to pay the premiums, you can increase or decrease your payments as your financial situation changes. If the charity is paying the premiums, they can adjust them based on their budget. This makes universal life a great option for donors and charities that anticipate changing financial circumstances but still want to establish a significant, long-term gift.
Term life insurance is the most straightforward and often the most affordable type of life insurance. It provides coverage for a specific period—or "term"—such as 10, 20, or 30 years. However, it’s important to understand that it does not build cash value and is only valid for that specified term. If you outlive the policy's term, the coverage ends, and the charity receives nothing.
Because of this, term life is generally less suitable for long-term charitable giving strategies. It lacks the permanence and living benefits of whole or universal life. A term policy might only make sense in a niche situation, such as a short-term fundraising campaign where the policy covers the life of a key donor for the duration of the campaign.
Giving a gift of this magnitude is a powerful move, but it’s not as simple as just writing a check. Charity owned life insurance comes with specific rules that protect you, the charity, and the integrity of the gift itself. Getting these details right from the start ensures your donation has the exact impact you intend it to. Think of these rules not as hurdles, but as the framework for a successful and strategic gift that aligns with your values and financial goals.
When you structure a CHOLI policy correctly, you create a win-win: the charity receives a significant future donation, and you receive valuable tax benefits while simplifying your estate. However, a misstep in the process can lead to unintended consequences, like a denied tax deduction or a policy that doesn't perform as expected. Understanding the mechanics of insurable interest, premium payments, and policy ownership will help you structure the donation correctly for maximum benefit. It also helps you sidestep common misunderstandings that could complicate your tax or estate situation down the line. Let’s walk through the most important rules and risks you need to be aware of before you begin.
Before a charity can take out a life insurance policy on you, it must have an "insurable interest" in your life. This legal concept means the charity has a financial justification for the policy—essentially, it would experience a financial loss upon your passing, which the death benefit would help offset. This is typically established through a history of significant donations or a long-standing relationship. Because state laws on what constitutes insurable interest can vary, it’s wise to have legal counsel verify that the charity is eligible to own a policy on your life in your state.
Once the policy is active, the charity, as the owner, is responsible for making sure the premiums are paid. If they aren't, the policy could lapse, and the future gift would be lost. As the donor, you can support this by making ongoing cash gifts to the charity to cover the premium costs. These gifts are generally tax-deductible. Here’s a key detail: to get the full deduction, you should make the gift to the charity, not pay the insurance company directly. This keeps the transaction clean and ensures you receive the proper tax benefits for your generosity.
For a CHOLI arrangement to work, the charity must be the sole owner and beneficiary of the policy. This is a non-negotiable. This is why CHOLI works best with permanent life insurance policies, like whole life, which build cash value over time. This growing cash value becomes an asset on the charity's balance sheet, which it can potentially borrow against if needed. By using a whole life insurance policy, you’re not just planning for a future death benefit—you’re giving the organization a financial asset it can use for years to come.
One of the biggest mistakes donors make is not giving up complete control of the policy. If you’re donating an existing policy, you must transfer all your rights to the charity to qualify for an income tax deduction. This means you can no longer change the beneficiary, borrow against the cash value, or surrender the policy. You are making an irrevocable gift. Trying to retain any control over the policy after the donation can invalidate the tax benefits and create unnecessary complications for both you and the charity.
If you’re on the board of a non-profit or run a charity, you know that sustainable, long-term funding is the key to making a lasting impact. Charity Owned Life Insurance (CHOLI) can be a powerful tool for securing significant future gifts, but accepting these donations isn’t as simple as cashing a check. It requires a thoughtful strategy and clear internal processes. By setting up a formal CHOLI program, you create a straightforward path for donors to give generously while protecting your organization from potential compliance headaches and financial burdens down the road.
A well-structured program makes it easier for donors to say "yes" and ensures their gift serves your mission exactly as intended. It also signals to high-net-worth individuals that your organization is sophisticated, trustworthy, and capable of managing complex assets. Here’s how to build a CHOLI program that strengthens your organization’s financial future and helps you achieve your long-term goals.
Before you even mention CHOLI to a potential donor, your organization needs a solid game plan. The first step is to create a clear, written policy for accepting life insurance gifts. This document should act as your organization's rulebook, outlining exactly what types of policies you will accept and how you will manage them. For example, will you only accept whole life policies, or are you open to other types? Who is responsible for tracking and paying premiums if the donor is unable to?
Think of this as part of your organization's overall estate planning strategy. Having these guidelines in place prevents confusion and ensures every gift is handled consistently and professionally. It protects your non-profit from accepting a policy that could become a financial liability rather than an asset.
Once your internal policies are set, it’s time to let your supporters know about this powerful way to give. Start by incorporating information about CHOLI into your existing planned giving materials, like brochures, newsletters, and your website. You don’t need complex legal language; just a simple explanation of how it works and the impact it can have. Consider hosting a webinar with a financial professional to walk donors through the benefits.
You can also build relationships with local financial planners, insurance professionals, and estate attorneys. These experts are often the first people donors consult when making major financial decisions. By providing them with information about your CHOLI program, you equip them to present it as a viable option to their clients, creating a new stream of potential support for your cause. Our Learning Center is a great resource for educational content you can share.
Accepting a CHOLI policy is the beginning of a long-term commitment. Your organization needs a system for managing the policy effectively to ensure it ultimately pays out. This includes having a clear plan for who will cover the premium payments if the donor stops paying. If premiums lapse, the policy could lose its value, defeating the purpose of the gift entirely.
Most importantly, always work with a team of qualified professionals. Navigating the rules around life insurance and charitable giving can be complex. An experienced financial advisor and legal counsel can help you understand state-specific regulations, ensure compliance, and make sure every gift is structured correctly. This professional oversight protects your organization, honors the donor's intent, and secures the policy's future benefit for your mission.
CHOLI is a powerful tool, but it's not the only way to support a cause you care about. Understanding how it compares to other planned giving strategies helps you make the most intentional choice for your legacy. Let's look at a few common alternatives to see where CHOLI fits in and how it stands apart. This isn't about finding the single "best" option, but about finding the right fit for your specific financial picture and charitable goals. By comparing the mechanics and benefits, you can see which path aligns best with the impact you want to create.
A Charitable Remainder Trust (CRT) is another popular tool for planned giving. In simple terms, you place assets into a trust that pays you or another beneficiary an income for a set number of years. After that period, the remaining assets in the trust go to the charity. This strategy can provide you with an immediate tax benefit and a steady income stream, which is a major draw for many. However, CRTs are often more complex and expensive to set up and manage. CHOLI is typically more straightforward; the focus is entirely on the final gift, making it a simpler vehicle for your philanthropic legacy.
If you already own a life insurance policy, you might consider simply transferring ownership to a charity. This is a valid and generous option. When you donate an existing policy, you can receive an immediate tax deduction, and the charity gains an asset it can either cash out or hold. While this is a great way to give, CHOLI offers a more strategic approach to creating a new, larger gift. Instead of repurposing an old policy, you are funding a new one, often with a death benefit far greater than your total contributions. This allows you to leverage your donations into a much more significant future impact for the cause you support.
Ultimately, deciding if CHOLI is the right fit comes down to your personal goals. This strategy is an excellent choice if you want to make a substantial future gift without needing a large upfront cash donation. It allows you to turn smaller, consistent contributions into a major legacy gift, and the premium payments you help fund are generally tax-deductible. However, it’s crucial to look at your complete financial picture. A CHOLI policy should complement your overall estate plan, not complicate it. Speaking with a financial professional can help you determine if this powerful tool aligns with your long-term goals for your family, your finances, and your philanthropy.
Putting a Charity Owned Life Insurance policy in place is a collaborative effort that involves you, your chosen charity, and a team of financial professionals. It’s not something you can set up with a few clicks online, and that’s a good thing—it means the strategy is built correctly from the ground up to serve its purpose. Whether you’re a donor with a cause close to your heart or a charity looking to create a new giving program, the path forward involves a few clear, manageable steps. The key is to start the conversation and bring the right people to the table to ensure the process is smooth and the final gift is structured for maximum impact.
If you’re considering using CHOLI to support a cause, your first step is to talk with the charity. Find out if they have an existing planned giving program and if they’re equipped to accept and manage a life insurance policy. If they don’t have a formal program, don’t be discouraged. Many organizations are open to the idea but may need guidance on how to proceed. This is where you can help connect them with the right resources. From there, you’ll want to review your own financial picture to see how this gift fits into your broader estate plan. A well-structured donation should complement your personal financial goals, not compete with them.
For a nonprofit, launching a CHOLI program begins with creating a solid internal framework. You’ll need to establish clear policies for accepting, managing, and eventually receiving the benefits from donated policies. It’s also vital to educate your board and development team on how CHOLI works so they can speak confidently with donors. Once your policies are in place, you can develop materials like brochures and a dedicated webpage to explain the benefits of this giving strategy. To get the word out, you can collaborate with financial planners and estate attorneys in your community who can introduce the idea to their clients during their financial planning process.
CHOLI is a powerful tool, but it requires professional expertise to set up correctly. This isn’t a DIY strategy. A financial professional who understands the nuances of life insurance can help you and the charity select and structure the right type of policy. They will ensure the ownership and beneficiary designations are correct, the premium payments are handled properly, and the entire arrangement complies with state regulations. By working with an expert, donors can feel confident their gift will have a lasting impact, and charities can secure a sustainable source of future funding. This partnership is the bridge that connects a donor’s generosity with a charity’s mission.
Can the charity access the money in the policy before I pass away? Yes, and this is one of the most powerful features of using a permanent life insurance policy for CHOLI. When you use a whole life or universal life policy, it builds cash value over time. This cash value becomes an asset on the charity's balance sheet. The organization can then borrow against that cash value if it needs funds for an urgent project or to cover operational costs, all while the policy's death benefit remains intact for the future.
What happens if I can no longer afford to fund the premium payments? This is a common and important question. Since the charity is the owner of the policy, it is ultimately responsible for making sure the premiums are paid. If you can no longer make the contributions to cover the costs, the charity has a few options. It could use the policy's own cash value to pay the premiums for a while, find another donor to take over the funding, or choose to surrender the policy for its cash value. This is why it's so important for the charity to have clear internal policies before accepting this type of gift.
Why would I do this instead of just naming a charity in my will? Naming a charity in your will is a wonderful way to give, but CHOLI offers a few distinct advantages. First, your contributions toward the premiums are generally tax-deductible now, providing you an immediate financial benefit. Second, the life insurance policy is removed from your taxable estate, which can help reduce estate taxes for your heirs. Finally, the death benefit is often significantly larger than the total amount you contributed, allowing you to leverage your donations into a much larger final gift for the organization.
How does the tax deduction for CHOLI actually work? When you set up a CHOLI policy, you typically make annual cash donations to the charity, and the charity then uses that money to pay the policy premiums. Your cash donations are treated as tax-deductible charitable contributions for that year, subject to standard IRS limits. The key is to make your gift directly to the charity, not to the insurance company. This clean separation ensures you receive the proper tax deduction for your support.
What's the most important first step to take if I'm interested in CHOLI? The most important first step is to have a conversation with the charity you want to support. You need to find out if they have a planned giving program and if they are set up to accept and manage a life insurance policy. If they are, the next step is to bring in a financial professional who can work with both you and the organization to structure the policy correctly and ensure it aligns with your overall financial and estate plan.
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