Charitable Gift of Life Insurance

Eric Van Haaften Estate Planning with Life Insurance

When it comes to leaving a lasting impact on the world, sometimes we need to think beyond our own lifetimes. One powerful way to really make an impact is by utilizing charitable life insurance.

By including charities in your life insurance plans, you not only have the opportunity to make a significant philanthropic difference but also enjoy attractive tax benefits.

Understanding the various options available for incorporating a charitable insurance strategy and how this can affect your taxes is important.

Learn how charitable insurance can support your favorite organization and positively impact the community.

QUICK NAVIGATION LINKS

What are three charitable ways to gift life insurance?
How do you designate a charity as a beneficiary?
How do you donate an existing life insurance policy?
How to buy a charitable life insurance policy?
How can I replace my donation to my family with life insurance?
FAQ: Charitable Insurance Policies

3 Charitable Ways to Gift Life Insurance

As a member of a local charity’s board and someone involved in fundraising, I’ve discovered that many people believe you can only donate to a charity while they are still alive.

According to the Giving USA 2023 Report, bequests to nonprofits totaled almost $46 billion, accounting for 9% of all gifts donated in 2022.

A bequest involves making gifts to a charity upon the donor’s death through instructions outlined in their will, trust, or beneficiary designation.

Another way to support your favorite charity after your passing is by donating an existing policy or buying new charitable insurance coverage.

Life insurance policies can be used as a flexible tool for philanthropy. They provide the option to make significant donations without depleting current assets.

By using charitable life insurance, individuals can convert tax-deductible premium payments into substantial contributions in the future.

This strategy enables people of all income levels to give more generously than they may be able to during their lifetime.

Before donating to a charitable organization, it is crucial to verify their credibility. Ensuring that the charity is eligible for tax-deductible donations guarantees that your contribution goes towards reputable causes.

To do this, you can check the IRS website or utilize resources like Charity Check 101, which provides detailed information on various 501(c)(3) charitable organizations.

Additionally, it’s essential to inform the charity of your intention and provide them with relevant details such as policy numbers and insurer names.

Taking this precaution ensures that your generosity goes towards reputable causes and makes a genuine impact.

Designate the Charity as a Beneficiary

One way to make a charitable contribution through life insurance is by updating the beneficiary designation on your policy. This involves selecting a charity to receive the death benefits when you pass away.

This method can be especially beneficial for individuals with life insurance coverage who no longer need it due to their children growing up or their spouse passing. And if you think about it, an existing policy might be sitting idle when it could serve a greater purpose.

By designating a charity as the beneficiary, you retain ownership of the policy and have the flexibility to change the beneficiary if necessary. You can choose whether to designate the charity as the primary or contingent beneficiary.

As a primary beneficiary, they will receive a specific amount or percentage from your policy upon your death.

If you select a charity secondary beneficiary(s), they will only receive any remaining balance if your primary beneficiary does not survive you.

While there are no immediate tax deductions when designating a charity solely as a beneficiary and not an owner of your life insurance policy, this approach still allows you to make a meaningful contribution towards giving back in the future.

Donating Life Insurance To Charity

Donating your existing life insurance policy directly to a church or charity is practical and easy to execute. By doing so, the non-profit organization will become the owner and beneficiary of the policy.

You could lower your taxable income with the right moves in donating policies. The accounting for such a donation involves claiming a federal income-tax deduction for the donated policy.

This deduction can be claimed for either the policy’s tax basis or cash surrender value, whichever is lower, in the donation year.

If you purchased a single premium or paid-up policy, you will only receive a one-time deduction in that year.

However, if future payments are required on the policy, each additional premium can be considered as a tax-deductible charitable gift.

It’s important to note that some states may have restrictions on charities purchasing life insurance policies from donors.

Therefore, consulting with the IRS or seeking guidance from a tax adviser regarding applicable laws in your state of residence is advisable.

Buying New Charitable Insurance

If you currently do not have life insurance, one option to consider is purchasing a new policy as a charitable gift.

This involves using premium payments to buy the policy, with the death benefit going to your chosen charity upon passing.

To be eligible for life insurance, you must meet specific requirements based on personal factors such as height, weight, medical history, and family background.

For this charitable gifting strategy to work effectively, the life insurance coverage must stay active until your passing.

So, permanent coverage options such as whole or universal life insurance are typically preferred because they remain the same throughout your lifetime.

The charity of your choice will become the policy’s owner and sole beneficiary. This means that when you die, they will receive the payout from the policy.

To make this possible, you must make annual tax-deductible gifts equaling the premium amount. Your chosen non-profit organization will use these gifts to pay the premiums continuously.

By utilizing this strategy, you can continue supporting a significant cause in your heart even after you’re gone.

Use our calculator to compare rates from top-rated insurance companies and get charitable insurance quotes to start giving back.

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Wealth Replacement with Life Insurance

There is a solution if you’re concerned about potentially leaving your family financially vulnerable after making a charitable donation.

Consider buying another permanent insurance policy to replace the funds donated to the charity.

Wealthy families often opt for wealth replacement coverage to ensure that any financial shortfall experienced due to the donation can be offset with the policy’s eventual death benefits.

By obtaining two separate death benefit policies, you can allocate portions of the benefits between your children and the chosen charity simultaneously.

To execute this approach, many affluent families establish various trusts in their estate planning.

According to Money Crashers, popular options include Wealth Replacement Trusts, Charitable Remainder Trusts, and Irrevocable Life Insurance Trusts.

If you need assistance creating a plan or have any other financial questions related to charitable giving, don’t hesitate to contact us!

We are here to provide guidance and ensure that your generous donations have a meaningful impact while safeguarding your family’s financial well-being.

FAQ: Charitable Insurance Policies

Do all charities accept charitable life insurance bequests? Contact the nonprofit before executing any charitable insurance giving strategy or signing any papers. Confirm that they are ready and able to accept it before proceeding with the donation process.

Are life insurance premiums tax deductible if the beneficiary is a charity? If you transfer ownership of the policy to a charity, both the premiums you have paid and future premium payments become tax deductible. Yet, the premiums are not deductible if you name the charity as the beneficiary without transferring ownership.

How does a wealth replacement trust work? This trust uses life insurance to preserve your family’s inheritance while still fulfilling your charitable objectives by replacing the value of donated assets.

Can life insurance be used to fund charities? You can designate a charity as the recipient of a life insurance policy. You can allocate the death benefit among your loved ones and include a percentage for the chosen charity. The exact distribution is at your discretion.

Can I name multiple charities as beneficiaries? Yes, it is possible to designate multiple charities as beneficiaries of your life insurance policy. You can even allocate a specific percentage of the death benefit to each charity. However, it’s important to ensure these charities are eligible for tax-deductible donations before naming them beneficiaries.