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How to Support Your Favorite Charity With Life Insurance

April 28, 2023
Our goal is to educate and advise on life insurance options, so you can feel confident in making the right choice, whether that’s through Quotacy or somewhere else. To ensure we provide accurate and trustworthy information, our writers follow strict editorial standards.

Are you looking for a unique and impactful way to support your favorite charity? One often overlooked yet powerful method is using life insurance.

Whether you’re a life insurance policy owner or considering purchasing one, in this guide, you’ll learn various ways you can leverage your policy to make meaningful contributions while potentially benefiting from tax advantages.

The Importance of Charitable Donations

Charitable donations play a crucial role in supporting the work of nonprofit organizations, allowing them to make a positive impact on the lives of countless individuals and communities. By contributing to your favorite charity, you’re actively participating in creating a better world. 

Here are some key reasons why charitable donations are essential:

  • Supporting vital causes: Your donation helps essential programs and services that address pressing social, environmental, and humanitarian issues. Your contribution can make a real difference in areas such as healthcare, education, poverty alleviation, and environmental conservation.
  • Strengthening communities: Charitable organizations often work at the grassroots level, providing resources and support to local communities. By donating, you’re helping build stronger, more resilient communities that can overcome challenges and thrive.
  • Fostering a culture of giving: When you donate to a charity, you inspire others to do the same, creating a ripple effect of generosity and kindness. Encouraging a culture of giving promotes empathy, compassion, and a sense of shared responsibility for the well-being of others.
  • Tax benefits: Charitable donations are tax-deductible, meaning that you can potentially reduce your taxable income while supporting a worthy cause.
  • Personal fulfillment: Contributing to a charity that aligns with your values and beliefs can provide a sense of purpose and personal satisfaction. Knowing that you’re making a positive impact on the lives of others can be deeply rewarding and fulfilling.

Remember that every donation, big or small, can make a difference. By supporting your favorite charity through life insurance or other means, you’re contributing to a brighter future for those in need.

How Life Insurance Can Help You Reach Your Philanthropic Goals

There are several options when it comes to donating to charity through life insurance. First, you need to decide whether to opt for a term or permanent life insurance policy.

Term Life Insurance

Term life insurance provides coverage for a specified period, such as 10, 20, 30, or 40 years. It typically offers more coverage for your money compared to permanent insurance. 

However, if you outlive the term, the charity won’t receive any death benefit. This option is ideal if you are looking for a cost-effective way to provide a substantial donation to your chosen charity, provided the policy is active during your passing.

Permanent Life Insurance

Permanent life insurance, such as whole or universal life, provides coverage that lasts for your entire lifetime, as long as you pay the premiums and keep the policy active. With this option, your chosen charity is guaranteed a significant contribution upon your death. 

One strategy to consider is reallocating your annual donations to the charity towards the life insurance premiums instead. By doing so, you can leave a much more substantial gift in the long run, creating a lasting impact on the charity’s work.

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After you decide whether term or permanent is a better option for you, then you need to decide how you want to gift the life insurance. There are a few ways to do so.

  1. Name the charity organization as beneficiary.
  2. Donate the life insurance policy.
  3. Use a trust.

Method 1: Naming a Charity as Your Life Insurance 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.

Method 2: Assigning Life Insurance Policy Ownership to a Charity

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:

  1. Not all states allow a charity to initially purchase a new policy, but all states generally allow charities to receive gifts of existing policies.
  2. 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.
  3. 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.
  4. The charity must be a qualified 501(c)(3) organization for you to claim the income tax deduction.

Method 3: Establishing a Charitable Trust With Life Insurance

A charitable trust is a legal arrangement that allows you to donate assets, such as life insurance proceeds, to a charity while still retaining some benefits for yourself or other beneficiaries. 

There are two common types of charitable trusts: 

  • Charitable Remainder Trusts (CRT) 
  • Charitable Lead Trusts (CLT)

Charitable Remainder Trust (CRT)

A CRT is an irrevocable trust that provides an income stream to you or your chosen beneficiaries for a specified period or for the lifetime of the beneficiaries. After the trust term ends or the beneficiaries pass away, the remaining assets in the trust are distributed to the designated charity or charities.

By establishing a CRT and funding it with a life insurance policy, you can enjoy several benefits:

  • Potential tax deductions for the value of your charitable contribution.
  • A reduction in estate taxes, as the trust assets are removed from your taxable estate.
  • The opportunity to convert appreciated assets into an income stream without incurring immediate capital gains taxes (this is allowed because CRTs are tax-exempt entities).

Charitable Lead Trust (CLT)

A CLT is the reverse of a CRT. In this arrangement, the charity receives an income stream from the trust for a specified period or for your lifetime. After the trust term ends or you pass away, any remaining assets in the trust are passed on to your designated non-charitable beneficiaries.

By creating a CLT and funding it with a life insurance policy, you can benefit in several ways:

  • Reduction in estate and gift taxes, as the value of the income stream donated to the charity is excluded from your taxable estate.
  • Preservation of your assets for your heirs by allowing them to receive the remaining trust assets after the trust term ends.
  • The satisfaction of supporting your favorite charity through regular income distributions.

It’s essential to work with an experienced estate planning attorney and a financial advisor when establishing a charitable trust. They can help you navigate the legal and financial complexities of setting up the trust and ensure that your objectives are met while complying with all relevant regulations.

Get a Life Insurance Quote Instantly, No Contact Information Required

Charitable giving through life insurance policies offers a unique and powerful way for individuals to create a lasting impact on their favorite causes and organizations. By understanding various methods of donating, such as naming a charity as a beneficiary, donating the life insurance policy itself, or using a trust, you can tailor your philanthropic efforts to best suit your financial situation and goals.

Not only do life insurance-based donations provide significant support to nonprofits, but they can also offer potential tax benefits and personal fulfillment to donors. Whether you already have a life insurance policy or are considering purchasing one, now is the perfect time to explore how you can use it to make a meaningful difference in the world.

To find the best life insurance policy to meet your charitable giving objectives, contact us here at Quotacy. As an experienced independent broker, we can help you navigate the various policy options available and guide you towards a solution that aligns with your philanthropic aspirations. 

Take action today. Get a free term life insurance quote to start making a lasting impact on the causes you care about. More interested in permanent life insurance? We can help with that, too. Complete this short form and one of our non-commissioned agents will reach out to provide personalized quotes.


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