How to Donate Your Life Insurance Proceeds to Charity: A Guide

 

Do you want to make a lasting impact on the world and support a cause that is close to your heart? Do you want to reduce your taxes and leave more money for your loved ones? If you answered yes to these questions, then you might want to consider donating your life insurance proceeds to charity.

Donating life insurance proceeds to charity is a smart and generous way to give. Life insurance can provide a large sum of money to a charity of your choice upon your death, which can help them achieve their mission and goals. Plus, you can enjoy some tax benefits while you are alive and reduce the size of your taxable estate.

You are not alone in wanting to donate life insurance to charity. According to a survey by LIMRA, a financial services research and consulting organization, more than a quarter of Americans who own life insurance say that one of the reasons they bought a policy was to provide a charitable gift.

But how do you donate your life insurance proceeds to charity? What are the different methods and what are their pros and cons? In this article, we will answer these questions and provide you with some guidance on how to donate your life insurance proceeds to charity in different ways.

Method 1: Name the Charity as the Beneficiary of an Existing Policy

One of the simplest ways to donate your life insurance proceeds to charity is by naming them as the direct beneficiary of an existing policy. This means that when you die, the insurance company will pay the benefits directly to the charity, without going through your estate or any other intermediaries.

You can use this method with any type of life insurance policy, either term or permanent. Term life insurance provides coverage for a specific period of time, such as 10, 20, or 30 years. Permanent life insurance provides coverage for your entire life, as long as you pay the premiums, and also accumulates cash value that you can access during your lifetime.

The advantages of this method are:

• Simplicity: You don’t have to do anything complicated or expensive to donate your life insurance proceeds to charity. You just have to fill out a beneficiary designation form with your insurance company and name the charity as the beneficiary. You can also change or revoke the beneficiary at any time if you change your mind or circumstances.
• Flexibility: You can name more than one charity as the beneficiary of your policy and specify how much each one will receive. You can also name contingent beneficiaries who will receive the benefits if the primary beneficiaries are no longer alive or in existence when you die.
• Privacy: Your donation will be kept confidential and will not be subject to probate or public scrutiny. The charity will not know about your donation until they receive it, unless you inform them beforehand.

The disadvantages of this method are:

• No tax deduction: You will not receive any tax deduction for the premiums you pay on the policy, since you are not transferring ownership of the policy to the charity. The premiums will be considered as part of your regular expenses.
• No control: You will not have any control over how the charity will use the proceeds from your policy after your death. The charity will have full discretion over how to allocate and spend the money according to their needs and objectives.
• Possible estate tax inclusion: Depending on the size of your estate and the applicable laws, your life insurance proceeds may be included in your taxable estate and subject to estate taxes. This could reduce the amount that your heirs and other beneficiaries will receive from your estate.

Method 2: Transfer Ownership of an Existing Policy to the Charity

Another way to donate your life insurance proceeds to charity is by transferring ownership of an existing policy to the charity. This means that you give up all rights and privileges over the policy and make the charity both the owner and the beneficiary of the policy. You will continue to pay the premiums on behalf of the charity, either directly or indirectly.

This method is more suitable for permanent life insurance policies, such as whole life, universal life, or variable life. These policies provide lifelong coverage and also have a cash value component that grows over time. The cash value can be accessed by the owner through loans or withdrawals.

The advantages of this method are:

• Immediate tax deduction: You will receive an immediate tax deduction for the fair market value of the policy or the cost basis, whichever is less, when you transfer ownership of the policy to the charity. The fair market value is determined by an appraisal or a formula provided by the IRS. The cost basis is the total amount of premiums you have paid on the policy minus any dividends or withdrawals you have received.
• Future tax deductions: You will also receive tax deductions for any future premiums you pay on the policy, either directly to the insurance company or indirectly to the charity. The premiums will be considered as charitable contributions and will reduce your taxable income.
• Removal from taxable estate: By transferring ownership of the policy to the charity, you will remove the policy from your taxable estate and avoid any potential estate taxes on the proceeds. This will also free up some space in your estate for other assets and beneficiaries.

The disadvantages of this method are:

• Irrevocability: Once you transfer ownership of the policy to the charity, you cannot change or revoke it. You will lose all access and control over the policy and its cash value. You will also lose the ability to change the beneficiary or use the policy as collateral for a loan.
• Loss of access to cash value: If you transfer ownership of a permanent life insurance policy to the charity, you will lose access to its cash value. The cash value will belong to the charity and they can use it as they see fit. They can also surrender the policy for cash if they need to.
• Possible gift tax consequences: Depending on the value of the policy and your lifetime gift tax exemption, you may have to pay gift taxes when you transfer ownership of the policy to the charity. The gift tax is a tax on transfers of property or money to another person or entity without receiving anything in return. The current lifetime gift tax exemption is $11.7 million per person in 2021.

Method 3: Take Out a New Policy in the Name of the Charity

A third way to donate your life insurance proceeds to charity is by taking out a new policy in the name of the charity. This means that you purchase a new life insurance policy, preferably permanent, and make the charity both the owner and the beneficiary of the policy. You will pay the premiums on behalf of the charity, either directly or indirectly.

This method is ideal for maximizing your charitable gift and creating a lasting legacy. You can choose a large amount of coverage that will provide a substantial donation to the charity upon your death. You can also choose a type of policy that suits your budget and goals, such as single premium, limited pay, or regular pay.

The advantages of this method are:

• Maximizing the charitable gift: By taking out a new policy in the name of the charity, you can multiply your donation by several times. For example, if you pay $100,000 for a single premium whole life insurance policy with a $250,000 death benefit, you can provide a $250,000 donation to the charity when you die. That’s more than double what you would have given if you donated $100,000 in cash.
• Receiving tax deductions for premiums paid: You will receive tax deductions for any premiums you pay on the policy, either directly to the insurance company or indirectly to the charity. The premiums will be considered as charitable contributions and will reduce your taxable income.
• Having no impact on existing estate plan: By taking out a new policy in the name of the charity, you will have no impact on your existing estate plan or assets. The policy will not be part of your taxable estate and will not affect your heirs or other beneficiaries.

The disadvantages of this method are:

• Higher cost: Taking out a new policy in the name of the charity may be more expensive than using an existing policy. You may have to pay higher premiums, especially if you are older or have health issues. You may also have to pay fees and commissions associated with buying a new policy.
• Medical underwriting: Taking out a new policy in the name of the charity may require medical underwriting, which is a process of evaluating your health and risk factors by an insurance company. You may have to undergo a physical exam, blood tests, and other medical tests. You may also have to answer questions about your medical history, lifestyle, and habits.
• Possible insurable interest issues: Taking out a new policy in the name of the charity may raise some insurable interest issues, which are legal requirements that ensure that there is a valid reason for buying life insurance on someone’s life. Generally, you can buy life insurance on yourself or someone who has a close relationship with you, such as a spouse, child, or business partner. However, some states may not recognize a charitable organization as having an insurable interest in your life, unless you have a personal or financial connection with them.

Conclusion

Donating your life insurance proceeds to charity is a wonderful way to support a cause that matters to you and leave a positive mark on the world. It can also provide you with some tax benefits and estate planning advantages.

However, there are different methods of donating life insurance proceeds to charity and each one has its own pros and cons. You should carefully weigh your options and consult with your financial advisor and your charity of your choice before making a decision.

Here are some examples of how each method of donating life insurance proceeds to charity could work in different scenarios:

• Alice is a 40-year-old single mother who has a term life insurance policy worth $500,000. She wants to support her local animal shelter, which helped her adopt her beloved dog. She decides to name the shelter as the beneficiary of her policy and informs them of her donation. She does not receive any tax deduction for the premiums she pays, but she knows that her gift will make a difference for the animals and the staff when she passes away.
• Bob is a 60-year-old retired lawyer who has a whole life insurance policy worth $1 million. He wants to donate his policy to his alma mater, which provided him with a scholarship and a quality education. He decides to transfer ownership of his policy to the university and continues to pay the premiums. He receives an immediate tax deduction for the fair market value of the policy and future tax deductions for the premiums he pays. He also removes the policy from his taxable estate and reduces his estate taxes.
• Carol is a 50-year-old business owner who has no dependents and a large net worth. She wants to create a lasting legacy for her favorite charity, which is dedicated to fighting poverty and hunger around the world. She decides to take out a new single premium universal life insurance policy worth $5 million in the name of the charity and pays $1 million for it. She receives a tax deduction for the premium she pays and maximizes her charitable gift. She also has no impact on her existing estate plan or assets.

As you can see, donating your life insurance proceeds to charity can be done in different ways, depending on your situation and goals. The important thing is to choose a method that works best for you and your charity.

We hope that this article has given you some useful information and insights on how to donate your life insurance proceeds to charity. If you have any questions or comments, please feel free to contact us or leave a comment below.

Thank you for reading and happy giving!