Every year, there are many people who donate money or goods to a charitable organization that is close to their heart. Yet, in a number of cases, these donors wish that they were able to contribute so much more. The good news is that by using a life insurance policy to make donations to your favorite charity, you can do just exactly that.
The use of life insurance in funding charitable donations can be an ideal way to leverage your financial support of an organization. In addition, if properly structured, both you and your estate could be able to also reap various tax advantages as well.
How to Set Up the Life Insurance Charitable Donation
When setting up the donation, you should list the charity as the named beneficiary on your life insurance policy. In doing so, both you and the organization will be able to obtain certain benefits.
In order to set the strategy in motion, you will be required to sign over the rights to your life insurance policy to the charitable organization. In doing so, however, you are simply giving up the option to make any additional changes to the policy without the consent of the charity.
When naming the charity as the beneficiary of the life insurance policy, you will pay the premium on the policy as you normally would. If, however, you are unable to continue making policy premiums in the future, the policy will be cancelled.
Upon death, the proceeds from the policy will be contributed to the charity as a charitable gift. Because life insurance death benefits that are paid to charities are not subject to taxation, the charity will be able to obtain the full face amount of the proceeds.
Benefits to Your Estate
In addition to the benefits that the charity will receive, your estate will also be eligible for certain tax advantages. For example, you will be able to deduct the premium payments that are made for the life insurance policy on your annual tax return. This can typically be done as an itemized deduction.
Also, by signing over the life insurance proceeds to the charity, these funds will not be included in the overall value of your taxable estate. Therefore, the amount of your potential estate tax liability will be reduced.
Additional Charitable Benefits
In addition to signing over the death benefit proceeds, there are also other ways in which you can provide financial benefits to your favorite charity through your life insurance policy. For example, if you have a policy that pays dividends, you could assign the policy dividends to instead be paid to the charity.
This strategy can be implemented by making the designation to assign the dividend payment on your policy application. As with signing over the death benefit, you will also receive additional tax related benefits for implementing this strategy as well. This is because you will be allowed to take a tax deduction each year as the dividends are paid out from the life insurance policy.
Charitable giving riders may also be added to life insurance policies for the purpose of donating to a charity via a life insurance plan. Typically, these types of policy riders are able to be placed on policies that have death benefits that are in amounts of $1 million or more.
In most cases, a life insurance policy that has a charitable giving rider will pay the death benefit amount to the policy’s beneficiary (or beneficiaries), and then it will pay an additional percentage – usually 1 – 2 percent of the policy’s face amount – to the charitable organization.
Even though these riders do have some limitations, they can provide policy holders with a very convenient way to donate funds to a charity that is meaningful to them, while at the same time benefiting their loved ones and survivors with life insurance proceeds too.
Other Important Considerations to Keep In Mind
When considering the donation of life insurance proceeds to a favorite charity, there are several factors that are important to keep in mind. One key criteria is that the best type of life insurance policy to use for this strategy is whole life insurance. This is because these policies do not expire like term life insurance does after a certain number of years.
Also, the charity that is chosen as the beneficiary of your life insurance proceeds must be a qualified 501(c)3 organization. This means that the entity must meet the IRS’s definition of a nonprofit organization. Otherwise, it will not qualify to receive the donation of the insurance proceeds.
Perhaps you’re concerned about qualifying for health insurance because of certain health conditions. Keep in mind that there are term life insurance policies available with no medical exam, so don’t let anything keep you from getting the coverage you deserve.