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.
Life insurance is one of the few ways you can guarantee your loved ones will have the money they need, even if something awful were to happen to you. Nobody wants to think about something tragic happening to themselves, but you can’t avoid it. Not planning for the inevitable is one the worst mistakes you can make for your loved ones.
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.
Getting Affordable Life Insurance
Regardless of who the beneficiary is of your life insurance policy, either your family or a charity, it’s important you get the cheapest premiums available. One of the most common reasons Americans don’t have life insurance is because they think it’s going to be too expensive to fit in their budget. In just about every situation, this couldn’t be further from the truth.
There are several ways you can ensure you’re getting the lowest premiums available. One thing you can do is cut out any tobacco you use. If you’re a smoker or you use chewing tobacco, then you should expect to drastically higher rates. Tobacco users have a higher chance of being diagnosed with various kinds of cancer or suffering from a heart attack. Smokers or tobaccos users are going to be considered “high-risk,” which is going to translate much higher monthly rates. Smokers are going to pay at least twice as much for their insurance protection.
The best way to ensure you have the best rates is to compare dozens of quotes before you decide which one is best for you. Every insurance company is different, and all of them have different rates or medical underwriting. Some insurance companies have stricter medical underwriting, which is going to lead to higher premiums. It’s important you find the best company.
There are thousands of companies on the market, and you could spend days calling different agents or researching companies. Instead of wasting your precious time, let us do all of the hard work for you. We can bring a personalized set of quotes directly to you.
You never know what’s going to happen tomorrow, which means you shouldn’t wait another day to get the insurance coverage your loved ones deserve. Don’t wait another day to get the life insurance your family needs. Contact one of our agents today and we can walk you through the process.