Definition of Replacement Value for Life Insurance

Gift your life insurance policy to charity and deduct the policy's replacement value.

Replacement value of a life insurance policy, which is the cost of purchasing an identical policy for a person of the same age, may be used to make a charitable gift. You may gift a life insurance policy to claim a tax deduction equal to the replacement value.

Significance

Life insurance may be used like a bequest when a donor transfers the policy to a charity. At the donor's death, the charity receives a lump sum distribution from the donated insurance policy. Gifting a fully paid or partially paid policy has different results for tax purposes. Not all states allow a charity to hold a donor's life insurance instrument.

Function

When making an outright gift of an insurance policy to charity, the donor should specify the charity as the policy owner and policy beneficiary. Rights to borrow against the policy or to assign the policy to another party are waived.

Considerations

In this example, the donor may claim the replacement value of the gifted policy as a tax deduction. When the replacement value equals more than the policy cost, deduction of the lesser cost prevails. Internal Revenue Service Publication 561 has details on personal implications (see the Resources section).

References

• "The Tax Law of Charitable Giving"; Bruce R. Hopkins; 2010: Review (p. 580)
• Internal Revenue Service: Publication 561
• Ronnie McClure PhD CPA: Gifts of Life Insurance

Resources

• "West Federal Taxation 2008"; William H. Hoffman, William A. Raabe, James E. Smith; 2007
• "Estate Planning with Life Insurance"; Glenn R. Stephens; 2009
• "Starting and Managing a Non-Profit Organization"; Bruce R. Hopkins; 2009
• Your Dictionary: bequest