Life Insurance: A Charitable Legacy Tool

Life insurance can be used as a charitable gift. There are several ways to do this, including naming a charity as the beneficiary of a policy, gifting an existing policy, or purchasing a new policy. Donors can also give an annual gift through dividends or transfer ownership of a policy to a charity. These methods offer different tax benefits and levels of flexibility, so it's important to understand the options before making a decision.

Naming a charity as a beneficiary

Benefits of Naming a Charity as Beneficiary

• Simplicity and Flexibility: Naming a charity as the beneficiary of your life insurance policy is a straightforward process. You can easily change the beneficiary to a charity of your choice, and most policies allow you to name multiple beneficiaries. This flexibility means you can divide the death benefit among your loved ones and the charity of your choice.
• Reduced Estate Tax: While this method does not offer income tax advantages, it can still reduce the donor's estate by the amount of the death benefit, potentially lowering the estate's tax burden.
• Privacy: Naming a charity as a beneficiary ensures the privacy of the transaction. This can be important for donors who wish to keep their charitable intentions confidential from their families or other heirs.
• Irrevocable Transfer: By naming a charity as a revocable beneficiary, you retain the flexibility to change your beneficiary or the payout amount they receive if your financial situation changes. This option also gives the charity the choice to continue the policy or allow it to lapse if you choose to stop paying the premiums.

Considerations

• No Immediate Impact: It is important to note that naming a charity as a beneficiary means the organization will receive the benefit after your passing. If you wish to make an immediate contribution, you may consider transferring ownership of the policy to the charity.
• Premium Payments: As the owner of the policy, you must continue paying premiums to keep the policy in force. Failing to do so may result in the policy lapsing.
• No Tax Deduction: Since you maintain control of the contract, you cannot get a tax deduction for naming a charity as a beneficiary.
• Beneficiary Change: The charity should be aware that the owner of the policy has the right to change the beneficiary at any time, so they should not rely solely on receiving the payout.

Overall, naming a charity as a beneficiary of your life insurance policy is a straightforward way to support your chosen cause while retaining ownership and flexibility during your lifetime.

Donating an existing policy

Gifting an existing life insurance policy to a charity is a great way to support your favourite causes while you are alive and after you have passed away. There are several ways to donate your life insurance policy to charity, and each has its own unique advantages and disadvantages. Here is a detailed and direct guide on donating an existing policy to charity:

Naming a charity as a beneficiary

The simplest way to donate your existing life insurance policy is to name a charity as the beneficiary. You can change the beneficiary of your policy to a charity of your choice, just as you would to a person. You will likely need to provide the Tax ID number of the organisation. It is also a good idea to inform the charity so that they can contact the insurance company to collect the payout when you pass away. By naming a charity as the beneficiary, you still own the policy, which gives you access to any cash value accumulation and the option to change the beneficiary if you wish. However, this method does not offer any income tax advantages, and the policy could be counted in the owner's estate for estate tax purposes.

Transfer ownership of a policy to a charity

Instead of naming a charity as the beneficiary, you can transfer ownership of your existing policy to the charity. This gives the charity immediate control of the contract, and they can name themselves as the beneficiary of the policy. If it is a permanent life insurance policy with cash value, the charity won't have to wait until your death to receive a payout; they could surrender the policy for the cash value immediately. By transferring ownership, you can take an immediate charitable contribution tax deduction. If premiums are still owed on the policy, you can continue paying them and take tax deductions. Additionally, the policy will be removed from your estate for estate tax purposes. However, it is important to note that this decision is irrevocable, and the charity will maintain control of the contract.

Gift dividends from a life insurance policy

If you want to get a charitable contribution tax deduction but don't want to transfer ownership of your policy, you can gift the dividends from your life insurance policy to charity. If you have a permanent life insurance policy, you may receive dividends from the insurance company, which you can donate to charity. You can take a tax deduction for donating dividends, and you also maintain ownership of your policy. However, the dividend pool is usually tied to the death benefit, so if the pool is donated, the death benefit will be reduced. Additionally, insurance policy dividends are not guaranteed and can vary from year to year, so the charity may not be able to count on a consistent contribution each year.

Purchasing a new policy

If you don't have an existing life insurance policy, you can still donate to charity by buying a new one and designating a charity as the owner and beneficiary. This strategy typically involves a limited payment policy, where premiums are paid for a set period. The insurer may limit the amount of insurance based on your charitable giving history or obligations.

You can make annual cash contributions to the charity so that it can pay the premiums. These contributions are usually tax-deductible, subject to IRS limits. The charity can then use the cash contributions or other funds to pay the premiums on the policy.

This method allows you to support charitable causes on an ongoing basis during your lifetime. Additionally, it provides flexibility in that the charity can receive the full benefit or share a part of it with your family.

It is important to note that some insurance companies may be restrictive about allowing a charity to be a beneficiary, which could impact your ability to obtain the policy. Consult a financial professional and tax advisor to explore the options and ensure that the charity will be able to benefit from your donation.

Gifting policy dividends

The dividends donated are deductible in the same way as premiums paid on a gifted policy, and this strategy does not require any additional cash outlay from the donor. You can also take a tax deduction for donating life insurance dividends. However, the dividend pool is usually tied to the death benefit, so if the pool is donated, the death benefit is reduced.

Dividends can be used to make recurring donations without affecting a family's budget. However, people should not rely on dividends alone to fund annual pledges or other recurring charitable commitments because they are not guaranteed and may not always be consistent from year to year.

Tax benefits of donating life insurance

Gifting a life insurance policy can be an effective way to give to charity. There are several methods for donating life insurance, each with its own unique advantages and tax benefits.

Naming a Charity as Beneficiary

The simplest way to provide a charity with the death benefit proceeds from a policy is to name a charity as the beneficiary. While this doesn't offer the same income tax advantages as gifting a policy, it still reduces the donor's estate by the amount of the death benefit. Donors can list a charity as a revocable beneficiary, giving them flexibility in case their financial situation changes. This method also ensures the privacy of the transaction, which can be important for donors who wish to keep their gifting intentions secret from their families or other heirs.

Gifting Policy Dividends

Policyholders can receive the dividends paid to their life insurance policies in cash and donate them to charity. These dividends are deductible in the same way that premiums paid on a gifted policy are, and this strategy does not require any additional cash outlay from the donor.

Transfer Ownership of a Policy to a Charity

Donors can transfer ownership of an existing policy to a charity, giving the organization immediate control of the contract. The charity can name itself as the beneficiary and receive a tax-free payout when the donor passes away. If the policy has cash value, the charity doesn't have to wait until the donor's death to receive a payout; it could surrender the policy for the cash value immediately. Donors can take an immediate charitable contribution tax deduction for transferring ownership to a charity. If premiums are still owed on the policy, donors can take tax deductions if they continue paying them. Additionally, the policy is removed from the donor's estate for estate tax purposes. However, it's important to note that this decision is irrevocable.

Purchase of a New Policy

Donors can also buy a new policy and designate the charity as the owner and beneficiary. This typically involves a limited payment policy, where premiums are paid for a set period. The donor can make annual cash contributions to the charity so that it can pay the premiums, and they may be entitled to an income tax deduction for these contributions, subject to IRS limits.

Frequently asked questions