Donating Life Insurance To Charity: A Comprehensive Guide

Life insurance can be donated to charity in a few different ways, and it can be a great way to support your favourite causes both during your lifetime and after you pass away. You can transfer the ownership of your policy to a charity, name a charity as a beneficiary while retaining ownership, or donate any policy dividends as regular gifts. There are tax benefits to donating life insurance, but they vary depending on the type of insurance and your circumstances.

Donate your entire life insurance policy to charity

Donating your entire life insurance policy to charity is a great way to support a cause you care about. Here are the steps you can take to donate your life insurance policy:

Choose a Charity:

Select a charitable organization that you want to support with your donation. Ensure that the charity is a qualified 501(c)(3) public charity, like a donor-advised fund, to maximize the tax benefits of your donation.

Contact the Charity:

Reach out to the charity to express your interest in donating your life insurance policy. Discuss the different options they may have available for accepting life insurance donations, such as changing the ownership of the policy or naming them as a beneficiary.

Understand the Tax Implications:

Consult with a tax advisor or financial professional to understand the tax benefits and implications of donating your life insurance policy. There may be income tax deductions, estate tax reductions, and other financial considerations to take into account.

Transfer Ownership or Name the Charity as Beneficiary:

Depending on the option that best suits your situation, you can transfer the ownership of your life insurance policy to the charity or name the charity as the beneficiary. Transferring ownership means the charity gains full control of the policy immediately, while naming them as a beneficiary allows you to retain ownership during your lifetime.

Complete the Necessary Paperwork:

Work with the charity and your insurance provider to fill out the required forms and documentation to effectuate the transfer of ownership or change of beneficiary. Ensure that all the necessary change of ownership forms are completed and submitted to the insurance company.

Consider Ongoing Premium Payments:

If your policy is not yet paid in full, discuss with the charity and your insurance provider who will be responsible for the outstanding premium payments. You may need to continue making premium payments or come to an alternative arrangement.

Remember, once you transfer ownership of the policy, the change is usually irreversible, and you won't be able to take the policy back. Donating your entire life insurance policy to charity is a generous act that can make a significant impact on the charitable organization you choose to support.

Name a charity as the beneficiary of your life insurance policy

Naming a charity as the beneficiary of your life insurance policy is a great way to support your favourite causes, both while you are alive and after you have passed away. There are several benefits to this approach:

Firstly, you get to retain ownership of the policy, which means you have continued access to the policy's cash value. This can be especially useful if you need to take out a life insurance loan or cash out on the policy before your passing. Additionally, you have the flexibility to change the charity named as the beneficiary if your charitable goals or financial priorities change.

Secondly, naming a charity as the beneficiary can often allow you to make a larger gift than you would be able to make through cash donations. For example, a healthy adult may be able to purchase a life insurance policy costing $100-$200 a month in premiums, with a $100,000 benefit. That benefit is far greater than what the person could donate at one time.

Thirdly, you can name multiple beneficiaries, splitting your death benefit between multiple charities or giving a specified portion to loved ones while also donating some. This allows you to extend your charitable legacy to multiple organisations or causes that are important to you.

Finally, there can be tax benefits to naming a charity as the beneficiary of your life insurance policy. For example, your charitable gift may reduce your taxable estate and lower estate taxes, and provide tax deductions for both the current value of the policy and any future premium payments. However, it is important to consult a tax advisor or financial professional to understand the specific tax implications for your individual circumstances.

Give an annual gift through dividends

If you want to donate your life insurance to charity, one option is to give an annual gift through dividends. This method allows you to support charitable causes on an ongoing basis during your lifetime. Many whole life insurance policies receive annual dividends from the issuing company, which can be used to make charitable donations. Dividends vary in amount and are never guaranteed, but some companies have paid dividends on a fairly regular basis. For example, MassMutual has paid annual dividends for over 150 years.

You can choose to receive any dividends that your whole life policy earns in cash and then donate them to the charity or charities of your choice each year. This way, you can change the charity you give to from year to year and see the fruits of your donations over time. Dividends can be donated in this way regardless of whether or not you decide to make the charity a beneficiary of your policy.

It's important to note that dividends taken in cash will not be taxable to the policyowner until they exceed the cost basis, which is the amount paid into the policy in premiums. The policyowner will usually receive a tax deduction for the contribution, subject to IRS limits.

While policy dividends can help make recurring donations without affecting your family's budget, it's not advisable to rely solely on them to fund annual pledges or other recurring charitable commitments. This is because policy dividends are not guaranteed and may not always be consistent from year to year.

Add a charitable giving rider

A charitable giving rider is an add-on to a term life insurance policy that ensures a charity of your choice will receive a payout without needing to be added as a beneficiary or have ownership of the policy transferred. This is a convenient way to donate to charity through your life insurance policy, as it doesn't require any additional cost or action from the policyholder, and the death benefit will not be reduced.

Charitable giving riders are not available with every life insurance policy, so it's important to speak to your insurer to see if this feature is available for your policy. When selecting a charity, you must choose a qualified 501(c)(3) charity that meets the Internal Revenue Service (IRS) definition of a nonprofit organization.

Here's a step-by-step guide on how to add a charitable giving rider to your life insurance policy:

• Contact your insurance provider: Get in touch with your insurance company to inquire about the availability of charitable giving riders for your specific policy. Ask about any limitations or requirements that may apply.
• Choose a qualified charity: Select a registered 501(c)(3) charity that you want to support. Ensure that the charity meets the IRS definition of a nonprofit organization. You can search for eligible charities using the IRS database.
• Request to add the charitable giving rider: Inform your insurance provider that you want to add a charitable giving rider to your policy. They will guide you through the necessary steps and paperwork.
• Specify the charity and donation details: Provide the insurance company with the name and details of the charity you have chosen. You may also need to specify the percentage or amount you wish to donate. In some cases, there may be limitations on the maximum allowable gift amount.
• Review and confirm the changes: Once you have provided all the necessary information, review the updated policy details to ensure that the charitable giving rider has been added correctly. Confirm the changes with your insurance provider.
• Make any necessary premium payments: Continue to pay the premiums on your life insurance policy as required. By doing so, you ensure that the policy remains active, and the charity will receive the donation upon your passing.

By following these steps, you can effectively add a charitable giving rider to your life insurance policy, allowing you to support a cause that is important to you without incurring additional costs or reducing the benefits for your loved ones.

Purchase a new policy and designate the charity as owner and beneficiary

If you're looking to donate your life insurance policy to charity, one way to do it is by purchasing a new policy and designating the charity as the owner and beneficiary. This method offers a few advantages and disadvantages for both the donor and the charity.

Advantages

For the donor:

• You can take an immediate charitable contribution tax deduction after transferring ownership to the charity. If you remain the payor and continue to pay premiums, you may be able to take tax deductions for those payments.
• The policy will be removed from your estate for estate tax purposes, potentially reducing your tax burden.
• You can leave a legacy for a cause you believe in and make a larger donation than you might be able to make using cash from your estate.

For the charity:

• The charity gains immediate control of the contract and can name itself as the beneficiary, ensuring it receives the donation.
• If the policy has cash value, the charity can choose to surrender the policy and receive the cash value immediately rather than waiting until the donor's death.
• The charity receives a tax-free payout.

Disadvantages

For the donor:

• The decision to transfer ownership is usually irrevocable, so you won't be able to change your mind or change the beneficiary.
• You may need to continue paying premiums to keep the policy in force, which could be an ongoing financial burden.

For the charity:

• If the policy is not paid up, the charity may need to take over premium payments, which could be a burden on their operating budget.
• The charity takes on the risk of the donor outliving the term of the policy, in which case they would not receive the death benefit.

It's important to carefully consider the advantages and disadvantages of this method and consult with a tax professional or financial planner to ensure you're choosing the right donation strategy for your situation. Additionally, it's a good idea to reach out to the charity you want to support to find out their preferences for receiving gifts of life insurance.

Frequently asked questions