Can I Use Life Insurance to Make Charitable Donations?

If you have a life insurance policy you may be reconsidering keeping and a legacy you want to build, consider donating it to your chosen charity. This strategy typically benefits both donor and charity. If you set things up correctly, you could get a tax break, and the charity receives a sizable donation, which could help them continue their work. It's a practical approach to philanthropy, allowing you to make a more significant contribution than you might be able to give as a cash donation.

In this article:

Life insurance donations: choosing the right insurance policy

Donating advantages: supporting charities can benefit both parties

How it works: add the charity as a beneficiary or name it as the insured?

Understanding life insurance for charitable giving

You have a few options if you plan to contribute to your favorite charities by giving them a life insurance donation. You can use any type of life insurance policy to donate to a charity. Whether this is a policy you already have or you plan to buy one to donate, you want to choose the policy that matches your intentions and the charity's needs.

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Main types of life insurance policies

Term life insurance. The purest form of life insurance. You pay a premium in exchange for coverage for a set period. The terms could be 10, 20, or 30 years, depending on your strategy and needs. It's usually the most affordable type of life insurance. However, it only pays out if you pass away during the term of the policy.

Whole life insurance. A bit different because they cover you for your entire life, not just a specific term. Whole life policies also have a cash value feature that grows over time, an added benefit. If you donate a whole life policy, your designated charity will receive and benefit from either the policy's cash value or the death benefit. This is an excellent option for you to provide a guaranteed benefit to the charity.

Universal life insurance. Much more flexible form of whole life, permanent insurance. Buying a universal life policy gives you coverage as long as you live with the potential for cash value growth. An added benefit is you have more control over premium payments and the death benefit amount. With this added flexibility, you can adjust your donations over time or change things if the charity has specific financial planning needs.

No matter which type of life insurance you decide, donating a life policy to a charity can be a great way to support their work. You can donate a policy by making the charity the policyholder and beneficiary (which will give you immediate tax benefits) or naming them as beneficiaries. At the same time, you keep ownership (allowing for a potential estate tax benefit). This is a great way to make a big difference for the charity you care about and provide you with some financial perks along the way.

Benefits of donating life insurance to charity

There are three compelling advantages to donating a life policy to a charity, which benefits the donor and the charity.

1. Make a larger donation without immediate financial burden

Using life insurance as a donation allows you to impact your charitable giving. You're committing a future asset without making a big dent in your finances. A relatively small annual premium payment on a life insurance policy can translate into a substantial payout to the charity when you pass. This allows you to make a more significant contribution than you might otherwise be able to afford if you dip into your savings.

2. Tax benefits for the donor

On the financial side, donating a life insurance policy can open the door to significant tax advantages. When you name a charity as the beneficiary of your policy while remaining the owner, you may not get the immediate tax benefits. Still, your estate will be in a much better position regarding estate taxes. Conversely, if you transfer policy ownership to the charity, you can take advantage of a nice tax deduction.

The size of the deduction will be equal to the policy's value at the time you donate it or the amount you've paid in premiums thus far, whichever is less. Each person’s tax situation is different, and even though some of these are allowable deductions, it’s a good idea to sit with an experienced tax advisor to discuss your situation.

3. Long-term support for the charity

This form of giving provides a charity with often-needed long-term support. Unlike cash donations that may be spent relatively quickly, a life insurance policy is a gift that the charity can depend on in the future. It can help them plan for long-term projects or endowments, positioning your generosity to make a lasting impact.

In the end, donating life insurance to a charity is a worthwhile strategy that benefits you now (with tax breaks) and later (by leaving a legacy). It also offers the charity a substantial future benefit that can help the charity fund its operations or other specific projects.

How to donate a life insurance policy to a charity

Donating a life insurance policy to a charity is not a complicated process, but it is essential to understand the options and steps involved. Here’s how you can go about it.

Making the charity the owner and beneficiary of the policy

When transferring your life insurance policy ownership to a charity, you give them complete control. At that point, the charity can cash in the policy now or keep it active for the future payout if that works out better for them.

Here is what you need to do to donate your policy:

1. Contact your insurance company. Let them know you intend to change the ownership of your policy to the charity of your choice.
2. Complete the necessary paperwork. Your insurer will have you fill out a change of ownership form, which they will provide you.
3. Transfer the ownership. Once your paperwork has been processed, the charity becomes the new owner of the policy.

Tax Benefits of transferring ownership of your policy. This move can offer immediate tax benefits. Generally, you can deduct the cash surrender value of the policy or the basis (the total premiums paid), whichever is less, on your tax return. This option is ideal if you want to reduce your taxable estate and get a tax deduction now.

Naming the charity as a beneficiary while retaining ownership

Alternatively, you can keep the ownership of your policy but name the charity as a beneficiary. This means the charity will receive the death benefit when you pass away, but you retain control over the policy during your lifetime. Here’s how to handle that:

• Update your policy. Contact your insurance provider and request to change the beneficiary to your chosen charity.
• Designate the charity. You can name the charity as the sole beneficiary or one of several beneficiaries on your policy. This will depend on how you want your policy’s death benefit distributed.
• Flexibility. This option allows you to change the beneficiary if you change your mind for whatever reason later on.

Even though this option doesn't necessarily give you a tax benefit right away, it can reduce the size of your estate by a significant amount and possibly lower your estate taxes. And, of course, it's a great way to leave a legacy without impacting your current financial situation.

Both methods we have discussed give you different ways to support a cause you care about with a future gift. As always, before you make a final decision on something of this nature, check with a tax professional to make sure you are on the right track.

Contributing by donating a life insurance policy to charity is a generous and strategic move benefiting the person donating and the charity receiving it. At the same time, planning your gift carefully by working closely with insurance professionals, financial advisors, and the charity itself allows you to avoid setbacks and make a meaningful contribution to your legacy.

Contact a financial advisor or your chosen charity directly for more detailed guidance. Personalized assistance can help you navigate the specifics of your donation, ensuring your generous act makes the most significant impact possible.