Leave a Legacy : All About Donating Your Life Insurance to Charity

Leave a Legacy : All About Donating Your Life Insurance to Charity

Donating your life insurance policy offers a meaningful opportunity to support a charity of your choice after you pass away. This method not only allows you to amplify your charitable giving but also provides potential tax advantages and access to funds that remain outside your taxable income.

While there are standard procedures for donating a life insurance policy to a charity, specific requirements can differ based on your policy type and the chosen charity. We recommend consulting with a personal finance or tax advisor to determine the optimal approach tailored to your circumstances but this article can get you started on the process and give you an idea about what to expect.

There are four main types of life insurance policies, each with its own advantages and disadvantages when donated to charity. Below, we briefly discuss these options. To learn more about the different types of life insurance and find the best option for you, please visit this section of our blog.

Term Life Insurance:

  • Lasts for a set period (typically 10-30 years)
  • Donation only applicable if the policyholder dies within the term
  • May not be the best choice for donations due to its limited duration

Whole Life Insurance:

  • Permanent coverage as long as premiums are paid
  • Reliable option for donations, as it lasts the policyholder’s entire life

Universal Life Insurance:

  • Flexible premiums and death benefits
  • Permanent coverage with premiums paid, making it ideal for donations

Variable Life Insurance:

  • Permanent coverage with an investment component
  • Potential for financial growth but carries market risk
  • Riskier option for donations due to fluctuating value


Donating Your Life Insurance Policy

Donating your life insurance policy to charity is a meaningful way to support a cause you care about, and there are several methods to do so, each with its own benefits and drawbacks.To support a charity, you can establish a new life insurance policy in the name of the charitable organization, which will grant you a charitable tax receipt for the policy’s cash value and any premiums paid. Alternatively, if your family no longer needs your existing policy for financial stability, you can name the charity as the beneficiary. Upon your death, the charity will receive the policy proceeds, and your estate will benefit from tax advantages. There are mainly three ways through which donations work.

  1. Name the Charity as a Beneficiary:

For policy owners, retaining ownership means access to cash value growth and the ability to adjust beneficiaries as needed. However, ongoing premium payments are required, and naming a charity as beneficiary does not qualify for tax deductions nor does it exclude the policy from estate taxes, notes Voegele. This also means the charity cannot rely on receiving the payout as the owner retains the right to change beneficiaries at any time. To summarize-

  • This is a flexible and straightforward option if you already have a life insurance policy.
  • You only need the charity’s Tax ID number to designate them as a beneficiary.
  • Upon your death, the charity receives a payout.
  • You can name multiple beneficiaries, including people and charities, and specify the percentage each will receive.
  • Transfer Policy Ownership:

Transferring ownership of a life insurance policy to a charity allows the donor to benefit from an immediate charitable contribution tax deduction and removes the policy from their estate for estate tax purposes, as noted by Voegele. However, this decision is irreversible, and the charity gains control over the policy, precluding any future changes. For the charity, assuming ownership means gaining the ability to name itself as beneficiary or cash out the policy, but it also carries the potential burden of covering ongoing premium payments if the policy isn’t fully paid up, which could strain operating budgets, especially in unexpected situations or unless the insured has a terminal illness.

To summarize-

  • For an immediate donation, you can transfer the policy’s ownership to the charity.
    • The charity can then name itself as the beneficiary and potentially cash out the policy before your passing.
    • You must continue to make monthly premium payments, but the charity can use the funds right away.
    • Transfer the ownership of an existing policy to the charity and receive a tax receipt for the policy’s cash value.

You’ll continue to pay any annual premiums, receiving tax receipts for these payments as well.

  • Gift Dividends:

Donating life insurance dividends offers owners a tax deduction while retaining policy ownership. However, Voegele cautions that donating dividends typically reduces the death benefit tied to the dividend pool. For charities, receiving a cash contribution without waiting for the insured’s death or assuming premium payments for transferred policies is advantageous. Yet, dividend amounts are not guaranteed and can fluctuate annually, potentially limiting annual contributions and making it difficult for charities to rely on consistent funding. It’s crucial to consult with a tax professional or financial planner before proceeding with any donation strategy to ensure it aligns with your financial goals. Additionally, contacting the intended organization to understand their policies on life insurance gifts ensures your generosity will benefit them effectively. To sum it up-

  • If you have a variable life insurance policy, you can donate the dividends earned to the charity.
    • This allows you to retain ownership of the policy while providing ongoing financial support to the charity.
    • You will also benefit from tax deductions on the donated dividends.

To ensure your life insurance donation is beneficial, start by contacting the charity to learn their preferred method of receiving such donations. Some charities may only accept specific types of policies, like whole life insurance, or they may prefer being named as the beneficiary rather than taking ownership of the policy. Collaborating directly with the charity helps guarantee your donation meets their needs.

When you speak with the charity, inquire about their donation procedures, complete any necessary change of ownership forms, and gather all required documentation. If you plan to claim the donation on your tax return, be sure to request the appropriate tax documents. This will help ensure your donation is tax-deductible and compliant with IRS regulations.

Benefits of Donating to Charity

Donating your life insurance policy to a charitable organization allows you to leave a lasting impact on your community while also enjoying significant tax benefits.   Life insurance donations are legally protected and separate from your other estate assets, ensuring your gift cannot be contested.This type of donation is not subject to taxes, probate costs, or estate debts, allowing you to make a substantial contribution with relatively small monthly or annual payments. Additionally, you receive charitable tax receipts for your donation, further reducing the cost.

For tax benefits, it’s best to choose a tax-exempt organization under section 501(c)(3). But you can also choose to donate to educational institutions for example your alma mater, religious organizations and health research institutions or any other research charities. It’s essential to make sure however, that your desired institutions do receive life insurance donations.  

By transferring ownership or naming the charity as the beneficiary, you can claim an immediate tax deduction equal to the policy’s value, reducing your taxable income and lowering your tax burden for the year. This method provides a way to support a cause without the need for a substantial upfront financial commitment, as you simply continue paying your premiums. Moreover, by designating a charitable organization as the beneficiary, you can protect your assets from estate taxes and avoid capital gains taxes, ensuring that your donation maximizes its impact both philanthropically and financially.

Finally, its important to remember that some insurance companies may require proof of previous charitable donations before allowing you to name a charity as a beneficiary, while others have fewer requirements. Although the process of donating your life insurance policy is relatively straightforward, following these steps can help ensure a smooth transaction.





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