Life Insurance For Non-Profits: Funding Peace Of Mind

Life insurance is a valuable tool for providing financial security for families, but it can also be used to meet charitable objectives. Non-profit organisations have unique insurance needs, and there are several providers that offer policies tailored to their requirements. Nonprofits Insurance Alliance (NIA) is one such provider, offering liability and property insurance designed specifically for nonprofits, with fair and equitable pricing. NIA also provides members with additional resources and tools, including a free risk management service. Other providers, like AMTrust, The Hartford, and GuideOne, also have experience working with nonprofits and can offer specialised attention. When choosing a life insurance policy, nonprofits should consider their specific industry needs, budget, and the coverage required to protect their assets and property.

Nonprofit organisations can buy life insurance to benefit a charity of their choice

Naming a charity as a beneficiary

The most straightforward approach is to designate a charity as the beneficiary of a permanent policy, such as whole life insurance. The donor retains ownership of the policy and has continued access to its cash value. The donor can also choose to give 100% of the benefit to charity, or split it between the charity and their family.

Gift of an existing policy

A donor can also choose to make a gift of an existing policy. They can change the ownership and beneficiary to the charity of their choice. If future premiums are needed to continue the policy, the donor can make annual cash contributions to the charity.

Purchase of a new policy

If no existing life insurance policy is available, the donor can buy a new policy and designate the charity as owner and beneficiary. This usually involves a limited payment policy, where premiums are paid for a set period.

Annual gifts through a life insurance policy

Many whole life insurance policies receive annual dividends from the issuing company. A policy owner can choose to receive these in cash and then donate them to the charity or charities of their choice each year.

Gifting policy dividends

While this will not provide as much benefit to a charity as the strategies above, policyholders can receive dividends in cash and donate them to charity. These donations are deductible in the same way as premiums paid on a gifted policy.

Life insurance can be donated to a charity as a gift of an existing policy

Firstly, you can name a charity as the beneficiary of your life insurance policy, allowing you to retain ownership of the policy while donating the death benefit after you pass away. You can name multiple beneficiaries, splitting your death benefit between multiple charities or giving a specified portion to loved ones while also donating some. As long as your beneficiaries are named revocably, you can always change them or the payout amount they receive.

Secondly, you can transfer ownership of your policy to the charity. This gives the charity immediate control of the contract, and they can name themselves as the beneficiary and receive a tax-free payout when you pass away. If the policy has cash value, the charity could access those funds before you pass away by taking out a life insurance loan, surrendering the policy, or taking out the full cash value amount. However, once you transfer ownership of the policy, you cannot change it back, and you or the charity will need to continue making premium payments if the policy is not yet paid in full.

Thirdly, you can make annual gifts to a charity through dividends. If your policy has a cash value component, you may receive dividends from the insurer, which you can then donate to a charity of your choice. This method offers flexibility, as you can change the charity you donate to each year.

Finally, you can purchase 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 insurer may limit the amount of insurance based on the donor's giving history or charitable obligations. The donor can make annual cash contributions to the charity so that the organisation can pay the premiums, and they will usually be entitled to an income tax deduction for these contributions, subject to IRS limits.

It is important to note that the tax consequences of donating a life insurance policy can vary depending on the method used, and it is recommended to consult a tax professional or financial planner before making any decisions. Additionally, the insurance company may require that you have a history of giving to a particular charity to donate your life insurance policy to them.

Donors can name a charity as a beneficiary of their life insurance policy

Naming a charity as a beneficiary also ensures the privacy of the transaction, which may be important for donors who wish to keep their gifting intentions private from their families or other heirs. The transfer of assets from an insurance contract cannot be contested, making it impossible for anyone to stop the donation from occurring.

Donors can name multiple beneficiaries and specify what percentage of the death benefit should go to each. For example, they can give 100% of their benefit to charity, or 80% to their family and 20% to charity, or any other combination. Alternatively, a charity can be named as a secondary beneficiary, also called a contingent beneficiary. If the primary beneficiaries cannot accept the death benefit, the charity would receive the insurance payout.

There is no federal or state tax benefit for naming a charity as a beneficiary, and premium payments cannot be written off as a tax deduction. Donors can only claim a charitable deduction if a charity owns their policy and they pay the premiums.

Donors can purchase a new life insurance policy and name a charity as the owner and beneficiary

Donors can choose to purchase a new life insurance policy and name a charity as the owner and beneficiary. This is a good option if the donor does not have an existing life insurance policy. Typically, this strategy involves a limited payment policy, where premiums are paid for a set period. The insurer may limit the amount of insurance based on the donor's giving history or charitable obligations. The donor can make annual cash contributions so that the charity can pay the premiums. The donor will usually be entitled to an income tax deduction for these contributions, subject to IRS limits. The charity can use the cash contributions or other funds to pay premiums on the policy.

This approach can be attractive because the donor can often make a larger gift—of the death benefit—than smaller gifts of cash. For example, a healthy adult may be able to purchase a life insurance policy costing a set number of premiums at $100-$200 a month with a $100,000 benefit. That benefit is far greater than what the person could donate at one time. Donors can also retain flexibility by naming the charity as a revocable beneficiary, allowing them to change the beneficiary or payout amount if their financial situation changes. Additionally, naming a charity as a beneficiary ensures the privacy of the transaction, which may be important for donors who wish to keep their gifting intentions confidential.

It is important to note that there is no federal or state tax benefit for naming a charity as the beneficiary of a life insurance policy. Donors can only claim a charitable deduction if a charity owns their policy and they pay the premiums. Before making such a donation, donors should consult a financial professional, tax advisor, or estate planning attorney to explore their options and ensure they are aware of all the tax details.

Policy dividends can be donated to a charity

If you have a permanent life insurance policy, you can choose to receive any dividends that your policy earns in cash and then donate them to the charity or charities of your choice each year. These dividends are taxable to the policyholder until they exceed the cost basis (the amount paid into the policy in premiums). You will usually receive a tax deduction for the contribution, subject to IRS limits.

Donating policy dividends will not provide the same amount of benefit to a charity as other strategies, such as gifting a life insurance policy or naming a charity as the beneficiary of your policy. However, it is still a valuable way to support charitable causes, especially for those who want to make ongoing donations during their lifetime.

It is important to note that policy dividends are not guaranteed and may vary from year to year. Therefore, donors should not rely solely on dividends to fund annual pledges or other recurring charitable commitments. Consulting a financial professional and tax advisor before making any decisions is always advisable to ensure that you are choosing the right donation strategy for your situation.

Frequently asked questions