According to the National Philanthropic Trust, the average American household contributes approximately $2,974 to charities each year. (Fun fact: Utah and Mississippi lead as the most charitable states.) It’s likely that many of these generous individuals wish they could give more, but don’t have the resources. Did you know that you can use life insurance to help your favorite charities?
Making a charitable gift through your life insurance can be a win-win for you and your favorite charity. With wise legacy planning, it’s possible to not only stretch your donation dollars and establish a legacy or endowment that lasts, but also benefit from some tax breaks too.
Why People Give Money to Charity
There are many different reasons people choose to donate:
- Perpetuation of one’s beliefs, values and ideals
- Compassion for those in need
- Enlightened self interest
- Earning community recognition
- Surviving family members or other heirs are not potential beneficiaries
- Income tax benefits
- Reducing the size of an estate
- Social capital (the ability to choose where your money goes when you pass away versus the government deciding.)
How Life Insurance Can Help
Before merging financial planning with philanthropic ideas, it’s best to first narrow down the best approach. To do so, there are a few things you need to ask:
- What goals do I want to achieve with this gift?
- How much money can I set aside to dedicate to gifting?
- What are the benefits for me?
There are many options when it comes to donating to charity via life insurance. The first decision to make is whether you want to purchase a term or permanent policy.
One of the key differences to understand is that while you can purchase much more term life insurance than permanent insurance for your money, if you don’t die during the term, your favorite charity won’t receive any death benefit.
See what you’d pay for life insurance
With a permanent life insurance plan, the charity is guaranteed a considerable contribution upon your death (pending of course you pay the premiums and keep the policy inforce). One strategy to consider would be to instead of donating to the charity annually as usual, use that amount to buy the policy so you can leave a much more significant gift in the long-run.
After you decide whether term or permanent is a better option for you, you then need to decide how you want to gift the life insurance. There are two main ways:
- Name the charity organization as beneficiary.
- Donate the life insurance policy.
Naming a Charity as a Beneficiary
This option is quite simple and can work even if you already own a life insurance policy. If you already own life insurance, you can add the charitable organization as another beneficiary and specify how you want the death benefit distributed.
You can also purchase a new policy and name the organization as the sole beneficiary. Like any beneficiary, the charity will receive the proceeds of your policy upon your death. And while you don’t receive an income tax deduction, your taxable estate is reduced.
Donating a Life Insurance Policy
When gifting a policy, the charitable organization would be the owner and beneficiary and you the insured, but continue paying the premiums. As a reward, you receive tax benefits because the charity owns the policy so it’s not included in your estate and premiums are income tax deductible.
However, this option isn’t as simple as naming a charity as a beneficiary. There are a few things you need to know first:
- Not all states allow a charity to initially purchase a new policy, but all states generally allow charities to receive gifts of existing policies.
- You need to prove you have a relationship with the charity, such as a past donation history. Life insurance companies don’t want a random charity owning a life insurance policy on someone.
- You need to ensure that your other financial needs are covered first and that you have the funds to make all premium payments – in other words, you are financially capable to continue your gift obligations.
Many of us have certain charities that are near and dear to our hearts. When planning how to best maximize your legacy, working with a trusted financial adviser is helpful so he or she can guide you through any tax issues.
About the writer
Natasha Cornelius, CLU
Senior Editor and Licensed Life Insurance Expert
Natasha Cornelius, CLU, is a writer, editor, and life insurance researcher for Quotacy.com where her goal is to make life insurance more transparent and easier to understand. She has been in the life insurance industry since 2010 and has been writing about life insurance since 2014. Natasha earned her Chartered Life Underwriter designation in 2022. She is also co-host of Quotacy’s YouTube series. Connect with her on LinkedIn.