What is “Financed” Charitable Life Insurance?

This is a technique that is also growing in popularity in the noncharitable marketplace. To summarize, the charity takes out a loan from a bank to pay premiums on a pool of insurance contracts. The death benefits, or in some cases other assets of the charity, are used as collateral for the cumulative loan. This planning is problematic in several ways. Depending on the circumstances, it may trigger unrelated business taxable income, and if the policy does not perform as well as projected, the underlying contract could lapse and the charity would be forced to repay a substantial cumulative loan plus interest with nothing to show in return. Such planning should be considered highly speculative and be scrutinized carefully by legal counsel.

Reproduced with permission.  Copyright The National Underwriter Co. Division of ALM

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